Petition — Sharon v. Commissioner

ican

Supreme Court, U.

FILED

~ APR 18 1979

In the Supreme Court le Mey CLERR |

United States ’

OctoBer TERM, 1978

Nunnber ....... 43 - 1 5 9 2

JoEL A, SHaron AnD ANN L. SHaron, Petitioners

v.

CoMMISSIONER OF INTERNAL REVENUE, Respondent

Petition for a Writ of Certiorari to

The United States Court of Appeals

for the Ninth Circuit

JoeL A. SHARON

13890 Ravenwood Drive

Saratoga, California 95070

Counsel for Petitioners

SORG PRINTING COMPANY OF CALIFORNIA, 346 FIRST STREET, SAN FRANCISCO 84105

Page

To cnsssantlinmscannesies 1

SN Sa ecsiettistrnsteee es 2

gS a 2

Statutes and Regulations Involved ........ -_ 2

Statement of the Case 3

i ae 3

2. Amortization of License ......... 5

ee eee 6

Reasons for Granting the Wit ..0...0..........ecccseecscsseeeeseeeees 6

a savaisunasocsaondnaceee 6

2. Amortization of License ....................-...ccccccocsccseeseees 8

3. Costs : a uete ll

Conclusion ................ 12

Appendix A: Opinion in This Case of the United

REESE a 1

Appendix B: Opinion in This Case of the United

States Court of Appeals for the Ninth Circuit ............ 21

Appendix C: Statutes and Regulations Involved ........ 27

TABLE OF CASES

Pages

Stanley E. Bailey, 30 TCM 460 (1971) -...00. 6

Herman EF. Bischoff, 25 TCM 538 (1966) ......0...2.2.....- 6

Bodzin v. Commissioner, 509 F.2nd 679, 75-1 USTC |

7 9190 (4th Cir., 1975) cert. denied 423 U.S. 825 ...... :

James L. Denison, 30 TCM 1074 (1971) -...0002 6

Marvin L. Dietrich, 30 TCM 685 (1971) ..............-...-...-. 6

Herbert W. Dustin, 53 T.C. 491 (1969) aff’d 467 F.2nd

47, 72-2 USTC { 9610 (Sth Cir., 1972) ........................ 9

Gilmore v. United States, 245 F.Supp.383, 65-2 USTC

Boone CUB. BD. Cal., TGR) nnn nssicnesenesennneees 11

Jack E. Golsen, 54 T.C. 742 (1970) aff’d 445 F.2nd 985,

71-2 USTC { 9497 (10th Cir., 1971) cert. denied 404

I itera eared ek geetea nics acaceaaweannteresoeiniitinentonocans 8

Richard Keith Johnson, 31 TCM 941 (1972) 00000002... 7

KWTX Broadcasting Co., 31 T.C. 952 (1959) aff’d 272

F.2nd 406, 60-1 USTC {[ 9106 (5th Cir., 1959) _02.. 9

George H. Newi, 432 F.2nd 998, 70-2 USTC 9669

(2nd Cir., 1970) aff'g 28 TCM 686 (1969) .oeccccssccccsese

Philpott v. Gardner, 403 F.2nd 774 (6th Cir., 1

Radio Station WBIR, Ine., 31 T.C. 803 (1959) .....0...... 9

Christopher A. Rafferty, 30 TCM 848 (1971) ~.00000... 6

Commissioner vy. Tellier, 385 U.S. 687 (1966) .0.0000000..... 7,8

Thomas v. S.S. Santa Mercedes, 572 F.2nd 1331 (9th

BARTERI A STRAIN SSRN Sey one ete Re 12

Tube Bar, Inc., 15 T.C. S22 (1950) 2......ccct.ccccescsssscerecsenves 9

Weten ¥. Helvering, ZOO UB. TEL .o.ccccccccccccs..cecesnccseseens 7,8

TABLE OF STATUTES

Pages

yA ER 8. § Gare CURT Sem EO NN 2

pb oe A: SUEDE ORO Ri eD Corie hy eee ee: 2,11, 12

Internal Revenue Code of 1954 (26 U.S.C.)

§ 162(a) ....... OPN R Eat We AE EN EID PS EA 2, 6, 7, 10

LBRO ERP reacts creer MO EMS JE ah ce AONE 2,9

I lic i cea re a eee ee 2,6

I era a a ee Ne eee ye |

Treasury Regulations on Income Tax (1954 Code)

(26 C.F.R.)

NE ida Oe te te Re SF 9

PE ie or te ee 4 eee aaa na 7

OTHER SOURCES

Rabkin and Johnson, 1 Federal Income, Gift and Es-

tate Taxation, 1973 edition, § 3.08(13) 0... 10

In the Supreme Court of the

United States

Octosper TERM, 1978

Number ................

Joe, A, SHaron Anp Ann L., SuHaron, Petitioners

V.

CoMMISSIONER OF INTERNAL REvENvE, Respondent

Petition for a Writ of Certiorari to

The United States Court of Appeals

for the Ninth Circuit

The petitioners, Joel A. Sharon and Ann L. Sharon re-

spectfully pray that a writ of certiorari issue to review the

judgment of the United States Court of Appeals for the

Ninth Circuit entered in this case on November 24, 1978.

OPINIONS BELOW

The findings of fact and opinion of the United States Tax

Court (Appendix A, infra, pp. 1-19) are reported at 66

T.C. 515 (1976). The opinion of the United States Court of

Appeals for the Ninth Circuit (Appendix B, infra, pp. 21-

25) is reported at .... F.2d ...., 78-2 USTC 7 9834.

9

se

JURISDICTION

The judgment of the Court of Appeals for the Ninth Cir-

cuit was entered on November 24, 1978. (Appendix B, infra,

p. 21). A timely petition for rehearing was denied on Jan-

uary 18, 1979, and this Petition for Certiorari was filed

within ninety days of that date. The jurisdiction of this

court is invoked under 28 USC § 1254 (1).

QUESTIONS PRESENTED

1. Whether the expense of maintaining an office in pe-

titioner’s home which was used exclusively for business,

professional, and investment purposes constitutes an ordi-

nary and necessary business expense deductible under In-

ternal Revenue Code Section 162 or an expense for the

production of income deductible under Internal Revenue

Code Section 212?

2. Whether amounts expended as a prerequisite to, and

for the purpose of, obtaining a license to practice law con-

stitute an appropriate cost basis for the regular amortiza-

tion deductions of the cost of such license pursuant to

Internal Revenue Code Section 167?

3. Whether the United States Tax Court has the legal

authority to award costs under 28 U.S.C. § 2412 to a peti-

tioner in the Tax Court?

STATUTES AND REGULATIONS INVOLVED

The pertinent provisions of the Internal Revenue Code

of 1954 [Sections 162(a), 167(a), 212 and 262] and the

Treasury Regulations on Income Tax pertaining to those

provisions as well as 28 U.S.C, § 2412 are set forth in Ap-

pendix C, infra, p. 27.

3

STATEMENT OF THE CASE

Issue 1. OFFICE IN HOME

During 1969 and 1970 petitioner! was employed as an

attorney by the Office of Regional Counsel, Internal Rev-

enue Service in San Francisco. During these years, peti-

tioner and his wife set aside one room in their apartment

to be used exclusively as an office. This office was then

exclusively used as such by petitioner for performing work

in connection with his employment, performing work in

connection with his investments and property held for the

production of income and for reading professional books

and journals to maintain petitioner’s professional com-

petence.

Petitioner chose the three bedroom apartment rather

than a similar two bedroom apartment in order to set aside

one room as an office, although the larger apartment was

$50-$60 per month more expensive. The apartment con-

tained two bedrooms, a living room, kitchen, and the office.

Petitioner and his wife occupied one bedroom. Their two

children, age 2 years and age 8 months, respectively, oc-

cupied a second bedroom. The third bedroom, which was

furnished with a desk, desk lamp, desk chair, room lamp,

and storage closet housing -files and a reference library,

served exclusively as an office. .

Petitioner used the office to review files, prepare for con-

ferences, draft briefs, motions or legal opinions and to

prepare for trials. Petitioner’s employment often necessi-

tated the performance of work after hours due to the ey-

clical nature of his work, extra burdens during trial cal-

1. Mrs. Sharon is a party to this action only because joint

returns were filed; Joel A. Sharon will hereinafter be referred to

as “petitioner’’.

a

endar periods, several deadlines occurring at one time and

backing up a fellow attorney on vacation. Sometimes a

trial itself would require the government attorney to work

after hours, Petitioner used the office on all such occasions

when he deemed it necessary or desirable.

Petitioner also used the office to do extensive reading in

order to keep current in the legal profession—reading bar

journals, law digests, legal newspapers, and other profes-

sional publications. In addition, he used the office to con-

duct the operation and management of his investments and

property held for the production of income—maintaining

books and records and files on investments and properties,

compiling and analyzing financial data and reports relative

thereto and reading and answering correspondence con-

cerning these matters.

Petitioner’s office in home was conducive to doing the

work described above because it was properly furnished

and equipped as an office and contained all the necessary

files, records, reference library, and office supplies and fur-

nished complete privacy.

On the other hand, the office furnished by petitioner’s

employer was not conducive to performing work after hours

or on weekends because the building became dark, cold,

and empty after hours; the employer’s stringent security

provisions necessitated being prepared with separate keys

to the building, the office, the library, and the files; and

use of the government office created a risk to the employee

of being held respoasible for loss of files or theft of equip-

ment.

Furthermore, when using the employer’s office after reg-

ular working hours, poor train and bus service created

the need to walk at night through San Franciseo’s most

undesirable area. In addition, the high cost of a meal in

5

a San Francisco restaurant compared to the low cost of

a family meal at home discouraged the use of the em-

ployer’s office.

Petitioner would not have devoted the time and effort

to the work described above if not for the availability of

his office in home. He used the office three or four hours

almost every evening and often on weekends. The office

was not used for matters of substantial personal use; nor

was it used by the children; it was used occasionally by

his wife to assist petitioner on some matter on which he

was working. When not in use as described, the office re-

mained vacant.

Issue 2. AMORTIZATION OF LICENSE

Petitioner attended Brandeis University from 1957 to

1961 and received his Bachelor of Arts degree in June 1961

at a cost of $11,125. He then attended Columbia University,

School of Law from 1961 to 1964 and received a Bachelor

of Laws degree in June 1964 at a cost of $6,910. Petitioner

also expended $210.00 in 1964 to gain admission to the

New York Bar. He was admitted to practice law in New

York on December 22, 1964 and was employed as an attor-

ney by a law firm in New York from 1964 to 1967.

As a prerequisite to sitting for the New York Bar, he

was required to have graduated from a fully accredited

four year undergraduate institution and to prove three

years of study at an accredited law school. On December

22, 1964, the cost of his license to practice law in New York,

as represented by the cost of his college and law school

degrees and other admission expenses totaled $18,245.00.

Petitioner moved to California in 1967 where he was

employed by the Internal Revenue Service. In 1969, he

expended $801.00 to become a member of the California

Bar to which he was admitted on May 14, 1969.

6

The Tax Court has characterized the fees paid to the

New York licensing authority, the expenses in gaining ad-

mission to the California Bar (and the cost of obtaining

admission to the U.S. Supreme Court which is no longer

an issue in this case) as capital expenditures amortizable

over petitioner’s life expectancy. However, the costs of

petitioner’s college and law school degrees, although pre-

requisites to obtaining admission to the New York bar,

were held by the Tax Court and the Ninth Cireuit to con-

stitute personal education expenses and were therefore not

deductible, citing Reg. 1.162-5.

Issue 3. CosTs

Petitioner paid $20 as the cost of filing the two Tax Court

petitions as well as other costs of litigation.

REASONS FOR GRANTING THE WRIT

Issue 1. OFFICE IN HOME

THERE IS A COMPELLING NEED FOR THIS

COURT TO GRANT THE WRIT IN ORDER TO RE-

SOLVE A CONFLICT AMONG THE CIRCUIT COURTS

OF APPEAL AND TO RE-ESTABLISH UNIFORMITY

OF TAX TREATMENT ON THIS ISSUE TO THE TAX-

PAYERS THROUGHOUT THIS COUNTRY.

For many. years, a deduction has been allowed for an

office in home under § 162 or § 212 where the use of the

office has been “appropriate and helpful” to one’s employ-

ment, business, or production of income activities. Herman

E. Bischoff, 25 TCM 538 (1966) ; Stanley E. Bailey, 30 TCM

460 (1971) ; Mervin L. Dietrich, 30 TCM 685 (1971) ; Chris-

topher A. Rafferty, 30 TCM 848 (1971) ; James L. Denison,

7

30 TCM 1074 (1971); Richard Keith Johnson, 31 TCM 941

(1972). This rule was resoundingly confirmed by the See-

ond Cireuit Court of Appeals in George IH. Newi, 432 F.2d

998, -70-2 USTC J 9669 (2nd Cir., 1970) aff’g 28 TCM 686

(1969) wherein the taxpayer, a salesman of television time

for American Broadcasting Company was allowed a de-

duction for his office in home on the ground that it was

“appropriate and helpful” to the conduct of his business

despite the fact that the ABC building was open in the

evening with office space available for Newi’s use. The See-

ond Circuit relied for its interpretation of the meaning of

the statutory language “ordinary and necessary” on the

standard already established by this Court in Welch «. ITel-

vering, 290 U.S. 111, 113 and Commissioner v. Tellier, 383

U.S. 687, 689 (1966), i.e., whether the contested expendi-

ture was “appropriate and helpful” to the conduct ef the

taxpaver’s business.

More recently in Bodzin v. Commissioner, 509 F.2d 679,

75-1 USTC $9190 (4th Cir., 1975) cert. denied 423 U.S. 825

the Fourth Cireuit Court of Appeals ruled to the contrary

that an Internal Revenue Service attorney who used an

office in his home was not entitled to deduct the expense

heecause it was personal and nondeduetible under § 262. The

Fourth Cireuit indicated that § 262 takes precedence over

$ 162 and found the office in home nondeduetible. Yet § 262?

was likewise carefully considered by the Second Cireuit in

Newi, supra, where the office in home was found deductible.

These cases involve interpretations of the very same sec-

tions of the Internal Revenue Code in strikingly similar

factual patterns with strikingly different results.

The Sharon case at bar represents the Ninth Cireuit fall-

ing in line with the Fourth Cireuit in direct antipathy to

2. The Court also analyzed Reg. § 1.262-1.

8

the Second Circuit. The Tax Court has agreed’, beginning

with the case at bar, to follow the Fourth Circuit, except

of course in the Second Cireuit where presumably it would

follow the Second Circuit rule under the Tax Court Golsen

doctrine.‘

In order to achieve uniformity in tax treatment across

these United States, in order to allow a citizen of Califor-

nia the same tax treatment as a citizen of New York, and

in order to administer the tax law with a fair and even

hand, it is respectfully urged that this writ be granted and

this Court speak with respect to this issue.

It is further urged that the standard established by the

Court in Welch v. Helvering, supra, and Commissioner v.

Tellier, supra, and as embraced by the Second Circuit in

Newt, supra, be strongly reconfirmed and that the Ninth

Cireuit opinion in the case at bar be reversed to allow a

deduction upon the ground that the use of petitioner’s of-

fice in home was “appropriate and helpful” to the conduct

of petitioner’s employment, profession and income produc-

ing activities.

Issue 2. AMORTIZATION OF LICENSE

THE WRIT SHOULD BE GRANTED TO DECIDE AN

IMPORTANT QUESTION OF FEDERAL TAX LAW

WHICH SHOULD BE FINALLY DETERMINED BY

THIS COURT.

The issue involved is the amortization of a license to

practice in one’s chosen profession. It has broad and wide-

3. Three judges dissented from the majority opinion on this

issue. See opinion, Appendix A, p. 16.

4. Jack E. Goisen, 54 T.C. 742 (1970) aff’d 445 F.2nd 985, 71-

2 USTC § 9497 (10th Cir., 1971) cert. denied 404 U.S. 940. The

Tax Court will follow the rule established, if any, by the Cireuit

in which it is sitting, i.e., the Cireuit to which an appeal would lie.

9

spread application to all lawyers, doctors, certified public

accountants and other professionals who are subject to li-

censing under state laws.

In the past most cases dealing with amortization dealt

with copyrights, patents, and other intangibles such as T'V

and radio licenses used by businesses. The Tax Court has

now decided that a lawyer’s license also is an intangible

asset used in a trade or business having a limited useful

life which can be estimated with reasonable accuracy and,

therefore, the cost of obtaining that license is amortizable

under Internal Revenue Code § 167. See Reg. § 1.167(a)3.

The license was, in fact, held by the Tax Court to be

amortizable over petitioner’s life expectancy. See opinion,

Appendix p. 1.

However, it is respectfully submitted that the Tax Court

(and the Ninth Circuit) have erroneously limited the cost

basis of the license to exclude the cost of college and law

school degrees. In general, the rule has been that the cost

basis of an intangible asset includes the purchase price of

the asset and all related expenses including fees and other

nondeductible items, For example, the cost basis for amor-

tization purposes of a radio or T'V license would include

the purchase price paid to a seller plus any legal, engineer-

ing, or other fees to obtain that license, such as attorney’s

fees at license hearings. See Radio Station WBIR, Inc.,

31 T.C. 803 (1959), KWTX Broadcasting Co., 31 T.C. 952

(1959) aff’d 272 F.2nd 406, 60-1 USTC 79106 (5th Cir.,

1959), Herbert W. Dustin, 53 T.C. 491 (1969) aff'd 467

F.2nd 47, 72-2 USTC J 9610 (9th Cir., 1972). See also Tube

Bar, Inc., 15 T.C, 922 (1950) wherein it was held that the

loss of $2,900 on the sale of certain real estate acquired as a

prerequisite to obtaining a liquor license constituted a part

of the cost of the license, Therefore, the cost of all pre-

10

requisites to obtaining the intangible asset, in this case, a

license, clearly form a part of the cost basis of that license.

Hence, the cost of college and law school degrees which

were conditions precedent to obtaining a law license form

a part of the cost basis of that law license.

The holding of the Tax Court and Ninth Cireuit to the

effe. t that the cost of petitioner’s college and law school

degrees are nondeductible would be unassailable if that

were the issue before us. However, petitioner is not arguing

that his college and law school expenses are deductible.

Rather, petitioner submits that these costs were pre-

requisite to obtaining a license and therefore mnst form a

part of the cost basis of that license. The cost of the col-

- lege and law school expenses, admittedly nonbusiness in

origin should not be tainted to any greater degree than a

typewriter purchased for personal use and used for non-

business purposes when later converted to business use. The

cost or value of the tvpewriter, when converted to business

use, becomes a tangible asset used in a trade or business

and qualifies for depreciation deductions, despite its prior

non-business origins. Why should not the cost of the license,

when converted to business use, become an intangible asset

used in a trade or business and qualify for amortization

deductions, despite its prior non-business origins?

It is therefore submitted that § 162 and Reg. 1.162-5

dealing with education expenses are not germane to this

issue.

The question is rather whether a capital expenditure must

exclude items having a personal or non-business character

or origin, The answer is clearly NO. According to Rabkin

and Johnson in 7 Federal Income, Gift and Estate Taxation,

1973 edition, $3.08 (13) at p. 368, “There is no rule that a

capital expenditure must have a business rather than a

il

personal origin”, citing Gilmore v. United States, 245 F.

Supp. 383, 65-2 USTC 7 9546 (U.S.D.C., N.D. Cal., 1965).

Note that in Gilmore, supra the District Court rejected the

government’s argument that a capital expenditure which is

“personal” in origin somehow thereby loses its status as a

capital expenditure (at p. 385).

Thus, the cost of college and law school degrees, even

though personal or non-business in origin (and non-

deductible in the year of payment), constitutes a capital

expenditure forming a part of the cost basis of. the license

on which amortization deductions may properly be claimed.

Issue 3. COSTS

A WRIT OF CERTIORARI SHOULD BE GRANTED

TO REVIEW AN ISSUE OF IMPORTANCE IN THE

INTERPRETATION OF A FEDERAL STATUTE,

Petitioner requested the Tax Court to award costs pur-

suant to 28 U.S.C. § 2412. The Tax Court denied costs con-

cluding that it was not empowered to do so by law. On

appeal, the Ninth Cireuit avoided the issue of the Tax

Court’s authority by finding that petitioner was not the

“prevailing party”.

Petitioner respectfully submits that it is a prevailing

party in part having been successful on several issues in

the Tax Court®. Petitioner need not be successful in toto in

order to be entitled to costs. Philpott v. Gardner, 403 F.2d

774 (6th Cir., 1968). It is a well founded principle that court

costs may be awarded to a party even if said party’s entire

5. Petitioner was successful in 1) being allowed to amortize fees

paid to the New York Bar, 2) being allowed to amortize fees in

gaining admission to the California Bar, 3) being allowed to

amortize the cost of gaining admission to the U.S. Supreme Court,

4) on the allocation between building and land and useful life of

the rental property. Opinion, Appendix A, p. 1.

12

claim is not sustained, Thomas v. S.S. Santa Mercedes, 572

F.2nd 1331 (9th Cir., 1978).

Petitioner respectfully urges this Court to determine that

Tax Court petitioners have a right to be awarded costs at

the discretion of the Tax Court and that the Tax Court

is so empowered under 28 U.S.C. § 2412, Despite the fact

that Congress has used broad and sweeping language in

§ 2412 and provided that costs may be awarded “in any civil

action brought by or against the United States or any

agency..... in any court having jurisdiction of such

action”. (emphasis added), the Tax Court has refused

to accept the grant of this power without higher authority.

It is submitted that a ruling would be appropriate to

clarify the role of the Tax Court with respect to its thou-

sands of petitioners annually. Even a ruling contrary to

petitioner’s request would pave the way for legislation on

the subject.

CONCLUSION

This petition for a writ of certiorari should be granted.

April 12, 1979

Respectfully submitted,

JoreL A. SHARON

13890 Ravenwood Drive

Saratoga, California 95070

Counsel for Petitioners

I FF TN 5

a =

TL

a eI rt A a

Appendix A

Tax Court Regular Decisions

JOEL A. SHARON

[CCH Dec. 33,890] JoEL A.SHARON AND ANN L. SHARON, PETITIONERS

v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 6189-71, 3597-72. 66 TC—, No. 52. Filed June 21,

1976. [Appealable, barring stipulation to the contrary, to CA-9—CCH.]

[ Code Secs. 162, 167, 179, 212 and 262]

[Business expenses: Home office rent: Attorney: Law school

degree: Bar review course: License to practice before U.S. Supreme

Court: Real property depreciation.] 1. P was an attorney employed

by the IRS. on ta 1969 and 1970, he occasionally used one room in

his apartment as a place for doing office work. Held, P is not

entitled to deductions under sec. 162 or sec. 212, I.R.C. 1954, for one-

sixth of the rental and other costs of the apartment. Stephen A.

Bodzin, 60 T.C. 820 (1973), revd. 509 F.2d 679 (4th Cir. 1975), cert.

denied 423 U.S. 825 (1975), will no longer be followed.

2. To enable P to enter the legal profession, the following

amounts were spent by or on his behalf: $11,125 to obtain a college

degree; $6,910 to obtain a law school degree; $175.20 to take bar

review courses; and $25 to take the New York State bar examina-

tion. Held, the costs of P’s college education, law school education,

and bar review courses are nondeductible personal expenses under

sec. 262, ILR.C. 1954. Held, further, the $25 a paid to the New York

licensing authority is a capital expenditure amortizable over P’s life

expectancy.

3. P paid $230 to take a California bar review course, $571 to

take the California bar examination, and $11 for the privilege of

practicing before two Federal courts in California. Held, the cost of

the California bar review course is a personal, nondeductible educa-

tional expenditure; held, further, other fees incurred in gaining

license to practice law in California are amortizable over P’s life

expectancy.

4. During 1970, P spent $313.35 in obtaining a license to prac-

tice before the U.S. Supreme Court. Held, the cost of obtaining a

license to practice before the Supreme Court of the United States

2 Appendix

Tax Court Regular Decisions

JOEL A. SHARON

was not a deductible business expense under sec. 162(a), I.R.C. 1954,

but was a capital expenditure amortizable over P’s life expectancy.

5. Remaining useful life and basis for depreciation determined

with respect to rental property owned by P.

6. P paid the sum of $20 as the costs of filing the two petitions

involved herein. Held,P is not entitled to an award of costs.

Joel A. Sharon and Ann L. Sharon, 4164 George Ave., San Mateo,

California, pro se. David L. Gibson and William E. Saul, for the

respondent.

SIMPSON, Judge: The Commissioner determined deficiencies in the

petitioners’ Federal income tax in the amounts of $235.56 for 1969 and

$653.70 for 1970. Due to concessions, the following issues remain for

decision: (1) Whether‘ one-sixth of the petitioners’ rental and other costs

of the apartment is deductible under either section 162(a) or section 212

of the Internal Revenue Code of 19541 as the cost of maintaining an

office in their home; (2) whether the petitioners are entitled to

amortization deductions under section 167(a)(1) with respect to certain

educational and other expenses incurred to enable the petitioner Joel A.

Sharon to obtain a license to practice law in the State of New York; (3)

whether the petitioners may deduct or amortize costs incurred by the

petitioner Joel A. Sharon in taking the California bar examination and

miscellaneous expenses incurred in obtaining admission to courts in that

State; (4) whether the petitioners may deduct under section 162, or

amortize pursuant to section 167, the cost of petitioner Joel A. Sharon’s

admission to the Supreme Court of the United States; (5) whether the

petitioners are entitled to depreciation deductions with respect to

residential rental property owned by them; and (6) whether the peti-

tioners are entitled to an award of Tax Court costs.

FINDINGS OF FACT

Some of the facts have been stipulated, and those facts are so found.

During the years 1969 and 1970, and at the time of filing the

petitions herein, Joel A. Sharon and Ann L. Sharon, husband and wife,

resided in San Mateo, Calif. They filed their joint Federal income tax

returns for the years 1969 and 1970 with the Internal Revenue Service

Center, Ogden, Utah. Mr. Sharon will sometimes be referred to as the

petitioner.

Home Office Expenses

The petitioner was employed as an attorney by the Office of

Regional Counsel, Internal Revenue Service, San Francisco, Calif., from

February 1967 to March 1972. During 1969 and 1970, the petitioner set

aside one room in his apartment to be used as an office. The office was a

1 All statutory references are to the Internal Revenue Code of 1954, as in effect during the

years at issue, unless otherwise indicated.

Appendiz 3

Tax Court Regular Decisions

JOEL A. SHARON

large room separated from the living room by sliding doors. The room

was furnished with a desk, desk lamp, desk chair, room lamp, and a type-

writer. The room also had a storage closet housing numerous files, cloth-

ing, and library books. The petitioner used the office for the ‘ollowing

purposes: (1) Performing work in connection with his employment; (2)

performing work in connection with investments and property held for

the production of income; (3) reading and reviewing various professional

books, journals, and other publications; and (4) handling personal

correspondence.

In connection with his employment, the petitioner used the office for

reviewing files, preparing for conferences, drafting briefs, and preparing

Tax Court cases for trial. During the 2 years in question, he handled 8 or

10 trials for his employer.

The petitioner's employer did not require him to maintain an office

at home or to work beyond regular working hours. He was given a set of

keys to the office provided by his employer. His office at home was not

better suited for the performance of his employment duties than the

office provided by his employer.

When he thought it necessary or desirable to work extra hours, the

petitioner found it more convenient to take his work home. The trains

and buses ran less frequently after 6 p.m. If he arrived in San Mateo

late, he would have to walk three-quarters of a mile to reach home,

whereas if he arrived earlier, his wife could meet him at the station and

drive him home. Also, by not staying at his employer's after hours, he

saved the expense of buying dinner at a downtown restaurant.

The petitioner also used the office at his home as a place to do

reading that he felt was necessary to keep current in the legal profession.

His reading matter included the American Bar Association Journal, the

New York State Bar-Journal, the California Bar Journal, the Journal of

Taxation, CCH Tax Advance Sheets, and various newspapers and

magazines of general interest. The subject matter of his reading included

no-fault insurance, prepaid legal insurance, law school developments,

legal ethics, and current developments in the tax law.

The office was also used in connection with the petitioner’s invest-

ments. Books, records, and files pertaining to his investments were stored

in the office. His activities in this regard included reading and answering

correspondence, reviewing and preparing financial statements, and

researching legal and financial data regarding possible investments.

The petitioner used the office for a maximum of approximately 15 to

20 hours per week. He kept no records regarding the use of the office, and

the record does not disclose what portion of the time was spent in connec-

tion with his employment as opposed to the time spent in connection

with his investments or other purposes. The office was not used by his

children. Occasionally, his wife would assist him in the office, but she did

not use it for any other reason. On infrequent occasions, when the

petitioners entertained a large group, they would keep the sliding doors

between the office and living raom open and permit guests to use both

rooms.

4 Appendix

Tax Court Regular Decisions

JOEL A. SHARON

The following expenses were incurred in the use of the petitioner's

apartment:

199 1970

Rent bbe Kesakvesvensevateulee’ $3,300 $3,360

MIRE) Sy 8 oetanuite Meanie kus 180 180

pO a A ee ae 5C 50

OREN Sew 'd 8S CS Gh KR 3,530 3,590

The room used by the petitioners as an office represented one-sixth

of their available apartment space. On their 1969 and 1970 joint Federal

income tax returns, they claimed deductions for “Office in Home

Expenses” in the amounts of $588.33 and $598.33, respectively.

Bar Admission Expenses

The petitioner attended Brandeis University from September 1957

to June 1961 and received a bachelor of arts degree upon his graduation.

During his years at Brandeis, the following expenses were paid by or on

behalf of the petitioner in connection with his education:

Academic year

1957-58 : 1958-59 1959-60 1960-61 Total

Tuition and fees................. $1,075 $1,080 $1,330 $1,330 $4,815

Room and board ................. 1,340 1,340 1,340 1,480 5,500

Books SAL heen eee ap a rae 100 100 100 100 400

Miscellancous .................... 100 100 100 110 410

OUR > i View Re ctals peu tis saa SOREL CEE AWS sy AE Wee tee Lae ea et ee 11,125

After graduation from Brandeis University, the petitioner entered

Columbia University School of Law, receiving a bachelor of laws degree

in June 1964. While pursuing his law degree at Columbia University, the

following expenses were paid by or on his behalf:

Academic year

1961-62 1962-63 1963-64 Total

Tuition and fees .................. $1,360 $1,360 $1,510 $4,230

Room and board .................. 2,130 0 0 2,130

Wi csbce hacks re eian che ae 150 150 150 450

Miscellaneous..................... 100 0 0 100

iS. fick tea katt Ae En ea ls a eee 6,910

In order to be eligible to take the New York bar examination, the

petitioner was required to graduate from a fully accredited 4-year

undergraduate institution and give evidence of his successful completion

of 3 years of study at an accredited law school. The petitioner expended a

total of $210.20 in gaining admission to practice law in the State of New

York. This amount included $175.20 for bar review courses and materials

related thereto and a New York State bar examination fee of $25.

The petitioner was admitted to practice law in the State of New

York on December 22, 1964. Thereafter, he was employed as an attorney

by a law firm in New York City until 1967, when he accepted a position

in the Office of Regional Counsel, Internal Revenue Service, and moved

to California.

Appendix 5

Tax Court Regular Decisions

JOEL A. SHARON

Although not required by his employer to be a member of the

California bar, the petitioner decided to become a member of that State’s

bar after moving there. However, he found that the study of California

law, which he undertook in preparation for the California bar examina-

tion, was helpful in his practice of law as an attorney in tne Regional

Counsel's office. The petitioner spent the following amounts in order to

gain membership in the California bar:

Registration as law student in California ........ $20

California bar review course ................... 230

General bar examination fee ................... 150

Attorney's bar examination fee. .............6. 375

pe Se Oe ne ae ee 26

Rh ES ane ee A ae Sa i 801

In 1969, the petitioner also spent a total of $11 in order to be ad-

mitted to practice before the U.S. District Court for the Northern Dis-

trict of California and the U.S. Court of Appeals for the Ninth Circuit.?

The petitioner’s employer required only that he be admitted to practice

before the U.S. Tax Court.

In 1970, the petitioner incurred the following expenses in connection

with his admission to the U.S. Supreme Court:

Round trip air fare,

San Francisco to New York ................. $238.35

Round trip rail fare,

New York to Washington,

and miscellaneous expenses ........-..-....- 75.00

DEP awsisd > ake < Pa wROVE Ss FE KAS h0.0 8000 nh 313.35

The petitioner’s employer did not require that he be admitted to

practice before the U.S. Supreme Court but did assist him in this matter.

The Chief Counsel of the IRS personally moved the admission of a group

of IRS attorneys, including the petitioner. Furthermore, two of his

supervisors signed his application as personal references.

During 1970, the U.S. Supreme Court rules required a personal

appearance before it in Washington, D.C., to be admitted to practice.

On their return for 1969, the petitioners claimed a deduction for

“Dues and Professional Expenses” of $492. TheCommissioner disallowed

$385 of such deduction on the grounds that the disallowed portion was

not a deductible business expense, but was a nondeductible capital

expenditure. On their return for 1970, the petitioners claimed a

deduction of $313.35 for the cost of petitioner Joel A. Sharon’s admission

to practice before the U.S. Supreme Court. The Commissioner also

disallowed such deduction. In addition to challenging the disallowed

deductions, the: petitioners alleged in their petition that they were

entitled to amortize or depreciate the cost of petitioner Joel A. Sharon’s

education. The Commissioner denied this allegation in his answer.

2 Although the parties stipulated that the total amount spent was $11, the petitioner

testified that the total spent was $15. We find that the amount spent was $11.

Cd

4

6 Appendix

Tax Court Regular Decisions

JOEL A. SHARON

Depreciation on Rental Property

The petitioner acquired a single family residential building located

at 1665 Borden Street, San Mateo, Calif., on November 30, 1970, at a

cost of $31,269.15. The petitioner took the property subject to the unpaid

balance of a 30-year note originally executed on April 14, 1964. The

property was acquired as rental property.

The property was 15 years old when acquired by the petitioner. The

building had a concrete foundation (no basement) and was a single-story

structure of wood frame construction with a tar and gravel roof. There

was a prior insurance policy outstanding on the property which insured

ihe building for $25,000. The petitioner replaced that policy with his own

policy likewise insuring the building for $25,000.

During 1970, the following amounts, attributable to the rental

property, were paid by the petitioner:

ROB RGA Bos thet ett he $89.81 Inburance:. 0.06... da on $67.00

PONONGEE Do reese ake 137.15 Miscellaneous ............ 78.52

Advertising .............. 58.80 TRON oarkinsk seco es 431.28

Shortly after purchasing the rental property, the petitioner rented it

for $295 a month. The total rent received for 1970 was $295. On their

1970 return, the petitioners claimed a net loss from their rental activity

equal to the excess of the actual expenses plus a deduction for deprecia-

tion over the amount of rent received. In computing the depreciation

deduction, the petitioner allocated $25,000 of the purchase price

($31,269.15) to the building and estimated the remaining useful life of

the building to be 15 years. The petitioner’s allocation of $25,000 to the

building was based upon discussions with his real estate broker as to the

value of the building, the amount of insurance carried on the building by

the prior owner, and upon his own opinion as to the building’s value. The

remaining useful life estimated by the petitioner was based upon his own

conclusion that the building was inexpensively and poorly constructed

and had an original useful life of only 30 years.

At trial, the petitioner indicated that he had failed to claim on his

1970 return an allocation as to the personal property which was

purchased along with the building. He now claims that of the $25,000

originally allocated to the building, the following amounts should be

allocated to items of personal property:

Carpets (5 rooms) .......... $850 Be Ve MRR os. bas sats $40

Drapes (5 rooms) .......... 500 Fireplace equipment vhs Spans 30

Hot water heater .......... 150 PAE BES xi, 5 kyla < Saleen Clb 90

Dishwasher................ 250

BPMNGIIBE solic 5 sieeve ee Oem 60 i | eed ee arene ee 1,970

The petitioner claims a 6-year useful life for each of these items of

personal property and maintains that he is entitled to an additional first-

year depreciation allowance under section 179.

Appendix 7

Tax Court Regular Decisions

JOEL A. SHARON

Tax Court Costs

The petitioners paid the sum of $20 to this Court as the fees charged

for filing their two petitions.

OPINION

1. Home Office Expenses

The first issue to be decided is whether the petitioner may deduct

one-sixth of the rental and other costs of his apartment for his “home

office.” The petitioner contends that one-sixth of such payments is

deductible under either section 162(a) or section 212. The Commissioner,

on the other hand, argues that, such expenditures were personal in nature

and are nondeductible under section 262. On virtually identical facts, we

upheld a deduction of home office expenses under section 162(a). Stephen

A. Bodzin, [Dec. 32,115], 60 T.C. 820 (1973), revd. 509 F.2d 679 (4th

Cir. 1975), cert. denied 423 U.S. 825 (1975). However, since the Fourth

Circuit reversed our decision in Bodzin, we take this opportunity to

reexamine the law on this recurring issue.

We begin with the relationship between the Code provisions relied

on by the parties. Section 162 falls within part VI of subchapter B and

section 262 falls within part IX of subchapter B of chapter 1 of the Code.

Section 161 provides that ‘there shall be allowed as deductions the items

specified in this part [part VI], subject to the exceptions provided in part

IX.” Section 262, falling within part IX of subchapter B, thus carves out

exceptions to what might otherwise be deductible expenses under section

162. The Supreme Court has recently recognized that the provisions in

part IX take precedence over the provisions im part VI. Commissioner v.

Idaho Power Co., [74-2 USTC 9521], 418 U.S. 1, 17 (1974); see also

Bodzin v. Commissioner, [75-1 USTC 49190], 509 F.2d at 681. The

petitioner, therefore, has the burden of showing that the disputed one-

sixth of his apartment expenses was not a personal expense.

Section 262 disallows any deduction for personal living or family

expenses, and section 1.262-1(b)3), Income Tax Regs., provides:

(3) Expenses of maintaining a household, including amounts paid for rent, water,

utilities, domestic service, and the like, are not deductible. A taxpayer who rents a

propesty for residential purposes, but incidentally conducts business there (his place of

usiness being elsewhere) shall not deduct any part of the rent. If, however, he uses part

of the house as his place of business, such portion of the rent and other similar expenses

as is properly attributable to such place of business is deductible as a business expense.

Under this regulation, the expense of maintaining one’s residence is

clearly. a personal expense, and a taxpayer can take part of his

apartment rent out of the nondeductible category only by showing that a

portion of his residence constitutes a place of business. The petitioner has

failed to make such ‘a showing. He maintained an apartment for

residential purposes and only incidentally used a spare bedroom, referred

to as his office, for business purposes. He used such room as a place to do

some reading and writing associated with his employment. This

incidental use falls short of establishing that the room was his place of

business.

8 Appendix

Tax Court Regular Decisions

JOEL A. SHARON

The petitioner’s occasional use of his home “office” rather than his

IRS office was purely a matter of personal convenience, comfort, or

economy. His spare bedroom was not better suited for doing his office

work. Compare Newi v. Commissioner, [70-2 USTC ¥ 9669], 432 F.2d

998, 1000 (2d Cir. 1970), affg. a Memorandum Opinion of this Court

Dec. 29, 641(M)] ; and Clarence Peiss, [Dec. 26,077], 40 T.C. 78 (1963).

he petitioner's employer did not require or expect him to do any of his

work at his home. To the contrary, his employer provided him with a

suitable office which was accessible to a law library, and furnished him

with a set of keys for entry during weekends and other off-duty hours. As

a general rule, he did night work at home only during emergencies, e.g.,

immediately prior to a Tax Court trial session, while preparing a brief, or

when called upon to handle the work of a fellow attorney on vacation.

The only other use of the room for purposes in any way related to his

work was for reading professional and other journals.’

Notwithstanding certain testimony of record, we are not convinced

that the petitioner rented a 3-bedroom rather than a 2-bedroom

apartment, thereby incurring additional expenses, so that he would have

a room for business use. In fact, he admitted that, shortly after the close

of the tax years at issue, he bought additional furniture, and moved a

couch, chair, and portable television set into the room and used it as a

bedroom for guests. During the tax years ai issue, he kept his personal

files, personal correspondence, and clothing in the room. All these facts

demonstrate that the expenses attributable to the room were essentially

nondeductibie personal expenses under section 262.

It is true that the Supreme Court has interpreted the word

“necessary” as used in a predecessor of section 162(a) to mean

“appropriate and helpful” in “the development of petitioner’s business.”

Welch v. Helvering, [3 USTC ¥ 1164], 290 U.S. 111, 113 (1933). It is also

true that the petitioner’s utilization of a room in his apartment for

occasional office work was appropriate and helpful in his work in the

sense that it was fitting, propér, and useful. However, that is not suf-

ficient for the purposes of section 162(a). The “appropriate and helpful”

concept is not a litmus test. Where there is a mixture of personal and

business considetations, that test, like the statutory “ordinary and

necessary”’ test, requires a weighing and balancing of all the facts so that

they may be given the proper order of importance, bearing in mind the

precedence of section 262, which denies deductions for personai expenses,

over section 162, which allows deductions for business expenses. Man

expenses, such as the cost of commuting (John C. Bruton, [Dec. 16,122],

9 T.C. 882, 885 (1947)) and ordinary clothing (Betsy Lusk Yeomans,

[Dec. 23,064], 30 T.C. 757, 768 (1958)), are helpful and even necessary

to an individual’s employment, but they are not deductible under section

162(a) because they are essentially personal. See Carroll v. Commis-

sioner, [69-2 USTC 4 9691], 418 F.2d 91, 95 (7th Cir.. 1969), affg. [Dec.

3 The petitioner refers to use of the room in connection with his investments, but he tells us

nothing of the nature and extent of his holdings and gives us no concrete facts as to how his use of

the room contributed to the production of income within the meaning of sec. 212.

Appendix 9

Tax Court Regular Decisions

JOEL A. SHARON

29,219] 51 T.C. 213 (1968). Many people in business or in the professions

may, from time to time, find it convenient to take work home with them,

but such occasional performance of business in the home does not convert

a part of the home into a place of business. The use of a portion of an

apartment for business purposes for reasons of personal convenience,

comfort, or economy will not support a deduction under section 162(a).

The facts here presented are so similar to the facts of the Bodzin

case, where we allowed a home office expense deduction to an IRS

attorney but were reversed by the Court of Appeals, we are unable to

distinguish it. We shall no longer follow our opinion in Bodzin.

2. Amortization of License to Practice Law in New York

The next issue to be decided is whether the petitioner may amortize

the cost of obtaining his license to practice law in New York. The

petitioner contends that he is entitled under section 167 to amortize the

cost of such license over the period from the date of his admission to the

bar to the date on which he reaches age 65, when he expects to retire. In

his cost basis of this “intangible asset,” he included the costs of obtaining

his college degree ($11,125), obtaining his law degree ($6,910), a bar

review course and related materials ($175.20), and the New York State

bar examination fee ($25).4 As justification for including these education

expenses in the cost of his license, he points out that, in order to take the

New York bar examination, he was required to have graduated from

college and an accredited law school.

The petitioners rely upon section 1.167(a)-3 of the Income Tax

Regulations, which provides in part:

If an intangible asset is known from experience or other factors to be of use in the

business or in the production of income for only a limited period, the length of which can

be estimated with reasonable accuracy, such an intangible asset may be the subject of a

depreciation allowance. * * *

There is no merit in the petitioner’s claim to an amortization

deduction for the cost of his education and related expenses in qualifying

himself for the legal profession. His college and law school expenses

provided him with a general education which will be beneficial to him in

a wide variety of ways. See James A. Carroll, [Dec. 29,219], 51 T.C. 213,

216 (1968). The costs and responsibility for obtaining such education are

personal. Section 1.262-1(b)9) of the Income Tax Regulations provides

that expenditures for education are deductible only if they qualify under

section 162 and section 1.162-5 of the regulations. In the words of section

1.162-5(b), all costs of ‘‘minimum educational requirements for

qualification in *** employment” are “personal expenditures ov

constitute an inseparable aggregate of personal and capital

expenditures.” There is no “rational” or workable basis for any allocation

‘The parties stipulated that the petitioner expended a total of $210.20 in connection with

gaining admission to practice law in New York. At the trial, the petitioner detailed the last two

items listed above, but the record does not show for what specific purpose the other $10 was used.

The expenditures for the petitioner's college and law school education may have been

furnished by his parents, but the Commissioner has not sought to deny the petitioners a

deduction for that reason.

10 Appendix

Tax Court Regular Decisions

JOEL A. SHARON

of this inseparable aggregate between the nondeductible personal

component and a deductible component of the total expense. Fausner v.

Commissioner, [73-2 USTC 99515], 413 U.S. 838, 839 (1973). Such

expenses are not made any less personal or any more separable from the

aggregate by attempting to capitalize them for amortization purposes.

David N. Bodley, {Dec. 30,997], 56 T.C. 1357, 1362 (1971); Nathaniel A.

Denman, [Dec. 28,519], 48 T.C. 439, 446 (1967); Huene v. United

States, [65-2 USTC 9 9488], 247 F. Supp. 564, 570 (S.D. N.Y. 1965).

Since the inseparable aggregate includes personal expenditures, the

preeminence of section 262 over section 167 precludes any amortization

deduction. Cf. Commissioner v. Idaho Power Co., 418 U.S. at 17: Bodzin

v. Commissioner, [75-1 USTC 99190], 509 F.2d at 681. The same

reasoning applies to the costs of review courses and related expenses

taken to qualify for the practice of a profession. William D. Glenn, (Dec.

32,613], 62 T.C. 270, 274-276 (1974).

In his brief, the petitioner attempts to distinguish our opinion in

Denman by asserting that he is not attempting to capitalize his

educational costs, but rather, the cost of his license to practice law.

Despite the label which the petitioner would apply to such costs, they

nonetheless constitute the costs of his education, which are personal and

nondeductible. Moreover, in his petition, he alleged that the capital asset

he was seeking to amortize was his education.

There remains the $25 fee paid for the petitioner's license to

practice in New York. This was not an educational expense but was a

fee paid for the privilege of practicing law in New York, a nontrans-

ferable license which has value beyond the taxable years, and such fee is

a capital expenditure. Cf. Arthur E. Ryman, Jr., [Dec. 29,460], 51 T.C.

799 (1969); Glenn L. Heigerick, [Dec. 27,846], 45 T.C. 475 (1966); S.M.

Howard, (Dec. 25,975], 39 T.C. 833 (1963); O.D. 452, 2 C.B. 157 (1920).

The Commissioner has limited his argument to the educational expenses

and apparently concedes that the fee may be amortized. Since the

amount of the fee is small, the petitioner might, ordinarily, be allowed to

elect to deduct the full amount of the fee in the year of payment, despite

its capital nature. Cf. sec. 1.162-12(a), Income Tax Regs., with respect to

the treatment of inexpensive tools. However, since the fee was paid prior

to the years in issue, we cannot allow a current deduction in this case.

Therefore, in view of the Commissioner's concession and our conclusion

with respect to the third and fourth issues, a proportionate part of such

fee may be added to the amounts to be amortized in accordance with our

resolution of the third issue.

3. License to Practice Law in California

The next issue to be decided is whether the petitioner may deduct or

amortize the expenses he incurred in gaining admission to practice before

the State and Federal courts of California. The Commissioner disallowed

5 In his petition, the petitioner only alleges that he should be allowed to amortize the cost of

his education. However, the parties have tried and briefed this case as though the amortization of

the petitioner's New York bar expenses were properly raised. Thus, we shall consider this issue.

Rule 41(bX1), Tax Court Rules of Practice and Procedure.

Ay pendix 11

Tax Court Regular Decisions

JOEL A. SHARON

the amounts paid in 1969 to take the attorney’s bar examination in

California and the amounts paid for admission to the bar of the US.

District Court for the Northern District of California and for admission

to the U.S. Court of Appeals for the Ninth Circuit. He determined that

such expenses were capital expenditures. In his brief, the petitioner

argues for a current deduction only if the costs of his license to practice

in California are not amortizable.

It is clear that the petitioner may not deduct under section 162(a)

the fees paid to take the California attorney’s bar examination and to

gain admission to practice before two Federal courts in California. In

Arthur E. Ryman, Jr., supra, an associate professor of law sought to

deduct as an ordinary business expense the cost of his admission to the

bar of the State in which he resided. We held that since the taxpayer

could reasonably expect the useful life of his license to extend beyond 1

year, the cost of such license was a capital expenditure and not a cur-

rently deductible business expense. Unlike the small fee paid’ to New

York, the aggregate amount of such payments in 1969 is too large to

disregard their capital nature and allow the petitioners to deduct them

currently.

In connection with his alternative claim that he be allowed to

amortize the costs of acquiring his license to practice law in California,

the petitioner asserts that such costs total $801. Such amount includes

the cost of a California bar review course, registration fees, and other

items specified in our Findings of Fact. However, the petitioner is in

error in including the cost of his bar review course, $230, in the capital

cost of his license to practice in California.

It is clear that the amount the petitioner paid for the bar review

course was an expenditure ‘‘made by an individual for education” within

the meaning of section 1.162-5(a) of the Income Tax Regulations. See

William D. Glenn, [Dec. 32,613], 62 T.C. 270, 273-274 (1974); sec.

1.162-5(b\2\iii), example (3), Income Tax Regs. Although the petitioner

was authorized to practice law in some jurisdictions when he took the

California bar review course, such course was nevertheless educational in

the same sense as the first bar review course. The deductibility of such

educational expenses is governed by the rules of section 1.162-5 of the

regulations. The evidence indicates that the petitioner took the

California bar examination twice, the latter time in early 1969, so that

the payment for the California bar review course must have been made

in a year prior to 1969. Thus, even if such payment is otherwise de-

ductible, it may not be deducted in 1969.

Nor may the petitioner treat the payment for the California bar

review course as a part of the costs of acquiring his license to practice in

California. Educational expenses which are incurred to meet the

minimum educational requirements for qualification in a taxpayer's

trade or business or which qualify him for a new trade or business are

“personal expenditures or constitute an inseparable aggregate of personal

and capital expenditures.” Sec. 1.162-5(b), Income Tax Regs. We find

12 Appendia

Tax Court Regular Decisions

JOEL A. SHARON

that the bar review course helped to qualify the petitioner for a new

trade or business so that its costs are personal expenses.

We have previously adopted a “commonsense approach’ in

determining whether an educational expenditure qualifies a taxpayer for

a “new trade or business.” Kenneth C. Davis, [Dec. 33,669], 65 T.C.

1014, 1019 (1976) ; William D. Glenn, [Dec. 32,613], 62 T.C. at 275;

Ronald F. Weiszmann, [ Dec. 29,765], 52 T.C. 1106, 1110 (1969), affd.

443 F.2d 29 (9th Cir. 1971). If the education qualifies the taxpayer to per-

form significantly different tasks and activities than he could perform prior

to the education, then the education qualifies him for a new trade or busi-

ness. William D. Glenn, supra; Ronald F. Weiszmann, supra. Thus, we

have held that a professor of social work is in a different trade or business

than a social caseworker. Kenneth C. Davis, supra. A licensed public

accountant is in a different trade or business than a certified public

accountant. William D. Glenn, supra. A registered pharmacist is in a dif-

ferent trade or business than an intern pharmacist, even though an

intern performs many of the same tasks as a registered pharmacist, but

ae Gary Antzoulatos, [Dec. 33,493(M)], T.C. Memo.

Before taking the bar review course and passing the attorney’s bar

examination, the petitioner was an attorney licensed to practice law in

New York. As an attorney for the Regional Counsel, he could represent

the Commissioner in this Court. However, he could not appear in either

the State courts of California, the Federal District Courts located there,

nor otherwise act as an attorney outside the scope of his employment

with the IRS. See Cal. Bus. & Prof. Code sec. 6125 (West 1974); 20 Op.

Cal. Atty. Gen. 291 (1952). If he had done so, he would have been guilty

of a misdemeanor. Cal. Bus. & Prof. Code sec. 6126 (West 1974). Yet,

after receiving his license to practice law in California, he became a

member of the State bar with all its accompanying privileges and obliga-

tions. He could appear and represent clients in all the courts of

California. By comparing the tasks and activities that the petitioner was

qualified to perform prior to receiving his license to practice in California

with the tasks and activities he was able to perform after receiving such

license, it is clear that he has qualified for a new trade or business.

Consequently, the expenses of his bar review course were personal and

are not includable in the cost of his license to practice law in California.

It is true that even before he became a member of the bar of

California, the petitioner was engaged in the business of practicing law.

Cf. David J. Primuth, [Dec. 29,985], 54 T.C. 374 (1970). However, in

applying the provisions of section 1.162-5 of the regulations to determine

whether educational expenses are personal or business in nature, it is not

enough to find that the petitioner was already engaged in some

business—we must ascertain the particular business in which he was

previously engaged and whether the education qualified him to engage in

a different business. Before taking the bar review course and becoming a

member of the bar of California, the petitioner could not generally

engage in the practice of law in that State, but the bar review course

helped to qualify him to engage in such business.

Appendix 13

Tax Court Regular Decisions

JOEL A. SHARON

The Commissioner does not argue that the capital expenditures

incurred in obtaining his license to practice law in California may not be

amortized. In a series of cases, the courts have held that the fees paid by

physicians to acquire hospital privileges are not current business

expenses but are capital expenditures amortizable over the doctor's life

expectancy. Walters v. Commissioner, [67-2 USTC 99677], 383 F.2d

922, 924 (6th Cir. 1967), affg. a Memorandum Opinion of this Court

[Dec. 29,045(M)]; Glenn L. Heigerick, [Dec. 27,846], 45 T.C. 475,

478-479 (1966); S.M. Howard, [Dec. 25,975], 39 T.C. 833, 838-839

(1963); compare Wells-Lee v. Commissioner, [66-1 USTC 9405], 360

F.2d 665, 672-673 (8th Cir. 1966), revg. and remanding in part a

Memorandum Opinion of this Court. We hold that the petitioner may

treat the costs of acquiring his license to practice in California in a

similar manner. Such costs include:

Registration fee ............. $20 U.S. District Court fee ....... $6

General bar exam fee ........ 150 U.S. Court of Appeals fee ..... 5

Attorney's bar exam fee ...... 375

Admittance fee .............. 26 UE Nak nutaow le cens 5 582

Although the petitioner testified that he would retire at age 65 if he were

financially able to do so, such testimony is not sufficient to establish the

shorter useful life for which he argues.

We are aware that the petitioner’s business as an employee of the

Office of Regional Counsel did not require him to become a member of

the California bar, and it may be argued that, within the meaning of

section 167(a)\(1), this intangible asset was not “used” in the petitioner’s

business during 1969 and 1970. However, the record does demonstrate

that membership in the California bar was of some assistance to the

petitioner in those years. Furthermore, when an attorney commences the

practice of law, it is impossible to anticipate where his work will take

him. He cannot with certainty establish what work he will receive and

what bar memberships will be useful to him. Once he launches into the

practice of law, he must decide what bars to join, and so long as there is

some rational connection between his present or prospective work and

those that he joins, we think that the expenses of joining them should be

accepted as an appropriate cost of acquiring the necessary licenses to

practice his profession. Since in 1969 and 1970, the petitioner was

working in California, he had reason to anticipate that he might

eventually leave the Government and enter into the private practice of

law in that State; thus, when that possibility is considered together with

the immediate benefit to be derived from membership in the California

bar, there was ample reason for him to join such bar at that time. For

these reasons, we are satisfied that in 1969 and 1970, the petitioner did

make use of the tangible asset constituting the privilege of practicing law

in California.

4. Supreme Court Admission

The fourth issue to be decided is whether the petitioner may either

deduct or amortize the cost of gaining admission to practice before the

14 Appendix

Tax Court Regular Decisions

JOEL A. SHARON

U.S. Supreme Court. The petitioner deducted the travel costs he incurred

in 1970 in traveling to Washington, D.C., to be personally present for the

Supreme Court admission, as required by that Court’s rules. The

Commissioner disallowed the deduction and argued in his brief that such

expenditures were capital in nature since the petitioner acquired an asset

with a useful life beyond 1 year.

In his brief, the petitioner concedes that he may not deduct the costs

he incurred if we find that his license to practice before the Supreme

Court is an intangible asset with a useful life of more than 1 year. For

the same reasons that we have concluded that the petitioner’s New York

and California licenses were intangible assets with a useful life of more

than 1 year, we also hold that his Supreme Court license is an intangible

asset with a useful life exceeding 1 year. Thus, the petitioner may not

deduct under section 162 the cost of obtaining such license.

In order for such license to be amortizable pursuant to section 167,

the petitioner must show that it was property used in his trade or

business. There is little evidence concerning the petitioner’s “use” in

1970 of his license to practice before the Supreme Court. However, he did

testify that the admission to various bars was a factor used in evaluating

attorneys for promotion by his employer, and the Commissioner never

disputed such testimony. Furthermore, it is altogether appropriate for

any attorney-at-law to become a member of the bar of the Supreme

Court whenever it is convenient for him to do so. No one can know when

the membership in such bar may be useful to him in the practice of

law—it may bring tangible benefits today, tomorrow, or never; yet, if one

holds himself out to practice law, there is ample reason for him to

acquire membership in the bar of the Supreme Court. Under these

circumstances, we find that the intangible asset acquired by becoming a

member of such bar was used by the petitioner in 1970 and hold that he

may amortize the costs of acquiring such asset over his life expectancy.

5. Depreciation on Rental Property

On November 30, 1970, the petitioners purchased rental property at

a cost of $31,269.15. On their return for 1970, they claimed a loss

resulting from the operation of this property. Due to concessions, the

only issue to be decided is the correct amount of the depreciation

deduction for 1970.8

The petitioner maintains that the purchase price of $31,269.15

should be allocated as follows:

ere $23,030.00

Parsee’ SeGperty . . ..0ccancsacheenee 1,970.00

PS Pe eee 6,269.15

He argues that the remaining useful life of the building was 15 years and

the remaining useful life of the personal property was 6 years. The Com-

missioner disallowed a deduction for depreciation, determining that the

*On their return for 1970, the petitioners deducted a full year's depreciation on the rental

property. In their brief, they concede that only 1 month's depreciation is allowable. See sec.

1.167(a}-10(b), Income Tax Regs.

Appendix 15

Tax Court Regular Decisions

JOEL A. SHARON

petitioner’s allocation of value to the building was unreasonably high and

that the assignment of useful life to the building was unreasonably low.

He does not indicate what he would consider to be a reasonable allocation

of the purchase price; nor does he indicate what he would consider to be a

reasonable estimate of the building’s remaining useful life.

The Commissioner’s complete refusa! to allow any depreciation on

the building and personal property is not realistic. Irene L. Bell, [Dec.

17,192], 13 T.C. 344, 347-348 (1949). In arriving at the correct determi-

nation as to the amount of the allowable depreciation deduction, we must

determine the petitioner’s basis for depreciation and the useful life of the

property to be depreciated. The only evidence presented on these issues

was the petitioner’s testimony, and the Commissioner did not cross-

examine on these points. Under the rule of Cohan v. Commissioner, [2-

USTC 4 489], 39 F.2d 540 (2d Cir. 1930), we find that the petitioner's

basis for depreciation in the building is $23,980 and that his basis for

depreciation in the personal property is $1,020. We find that the

remaining useful life of the building from the time of acquisition was 15

years and the remaining useful life of the personal property was 6 years.

The petitioners are not entitled to the additional first-year depreci-

ation allowance under section 179 with respect to the personal property.

The additional allowance under section 179 must be elected by the

taxpayer. Section 179(c) provides that the election shall be made within

the time prescribed by law for filing the return for the applicable year.

Under section 1.179-4(a), Income Tax Regs., the election—

shall be made by showing as a separate item on the taxpayer's income tax return the

total additional first-year depreciation claimed ***. The additional first-year

depreciation claimed with respect to section i79 property must not be included in the

depreciation claimed under section 167 with respect to such property. * * *

The petitioners did not elect the additional first-year allowance for

depreciation on their 1970 return and, therefore, are not entitled to the

benefit of section 179. Clinton H. Mitchell, [Dec. 26,938], 42 T.C. 953,

968 (1964).

6. Tax Court Costs

There is no statutory provision for the reimbursement of the

petitioners for the cost of filing their Tax Court petitions. Their reliance

on the provisions of 28 U.S.C. sections 24127 and 19208 (1970 ed.),

7 Sec. 2412. Costs.

Except as otherwise specificaily provided by statute, a judgment for costs, as enumerated in

section 1920 of this title but not including the fees and expenses of attorneys may be awarded to

the prevailing party in any civil action brought by or against the United States or any agency or

official of the United States acting in his official capacity, in any court having jurisdiction of

such action. A judgment for costs when taxed against the Government shall, in an amount

established by statute or court rule or order, be limited to reimbursing in whole or in part the pre-

vailing party for the costs incurred by him in the litigation. Payment of a judgment for costs

shall be as provided in section 2414 and section 2517 of this title for the payment of judgments

against the United States.

8 Sec. 1920. Taxation of costs.

A judge or clerk of any court of the United States may tax as costs the following:

(1) Fees of the clerk and marshal;

(2) Fees of the court reporter for all or any part of the stenographic transcript necessarily

16 Appendix

Tax Court Regular Decisions

JOEL A. SHARON

which allow costs to be taxed against the United States, is misplaced.

Those sections apply only to courts “the judges of which are entitled to

hold office during good behavior.”’ See 28 U.S.C. sec. 451 (1970 ed.).® The

United States Tax Court was consciously excluded from that definition of

a court. S. Rept. No. 1559, to accompany H.R. 3214, 80th Cong., 2d Sess.

2 (1948). Since there is no statutory authority for reimbursing the

—— for the costs of filing their petitions, their claim therefor is

enied.

To reflect the foregoing,

Reviewed by the Court.

Decisions will be entered under Rule 155.

_ Raum and HALL, Jy, did not participate in the consideration and

disposition of this case.

DAWSON, CJ., dissenting on Issue 1: I respectfully dissent from the

majority’s disallowance of the petitioner's home office expense deduction

under section 162(a), I.R.C. 1954. I would adhere to the position

previously taken by this Court in Stephen A. Bodzin, [Dec. 32,115], 60

T.C. 820 (1973), and not follow its reversal by the Court of Appeals for

the Fourth Circuit.

The majority acknowledges that the Supreme Court has used an

“appropriate and helpful” test, see Welch v. Helvering, [3 USTC

1164], 290 U.S. 111 (1933), when determining whether a claimed

expense is “necessary.” They find, however, that sections 262 of the

Code and 1.262-(1)(b)(3), Income Tax Regs., operate to bar any

home office deduction if the taxpayer habitually performs a more

significant amount of work elsewhere at a “place of business.”

though this regulation is, at first glance, susceptible to such an

interpretation, I believe that the majority position will prove to be

more restrictive in practice than Congress has intended.

I do not interpret the use of the phrase “incidentally performs

business there” in section 1.262-(1)(b)3), Income Tax Regs., to indicate

that the taxpayer’s primary place of business must be located within his

(Continued)

obtainéd for use in the case;

(3) Fees and disbursements for printing and witnesses;

(4) Fees for exemplification and copies of papers necessarily obtained for use in the case;

(5) Docket fees under section 1923 of this title.

pe A bill of costs shall be filed in the case and, upon allowance, included in the judgment or

cree.

® Sec. 451. Definitions.

As used in this title:

The term “court of the United States” includes the Supreme Court of the United States,

courts of appeals, district courts constituted by chapter 5 of this title, including the Court of

Claims, the Court of Customs and Patent Appeals, the Customs Court and any court created by

Act of Congress the judges of which are entitled to hold office during good behavior.

Appendix 17

Tax Court Regular Decisions

JOEL A. SHARON

residence in order to qualify for the deduction in issue. Home office

expenses unquestionably are deductible under section 162(a) in cases

where the employee has no other office or where the taxpayer’s duties

may be performed more readily at home than at his designated office.

See Newi v. Commissioner, [70-2 USTC 9 9669], 432 F.2d 998 (2d Cir.

1970); Clarence Peiss, [Dec. 26,077], 40 T.C. 78 (1963). At the other end

of this spectrum they are nondeductible if they are not both appropriate

and helpful. Welch v. Helvering, supra. However, section 162(a)

sanctions other deductions falling between the extremes of this

continuum, even if the expenses they represent are not specifically

mandated by the exigencies of the taxpayer’s business. In this way

section 162(a) grants .%xpayers some leeway in the conduct of their

business affairs.

This petitioner's. profession as a lawyer seemingly demanded more

hours of work per week than he was required to remain in his employer's

office. He conscientiously performed a substantial portion of his duties at

home in an area used primarily for such legal work. Thus, I would allow

the claimed deduction as long as his use of the facilities significantly

furthered the conduct of his professional affairs, even though there was

no compelling business reason requiring him to work at home. I find

interposed between “primary” and “incidental” a category of business

effort properly entitled “substantial” or “significant” which qualifies

this deduction under section 162. We cannot disregard 15 or 20 hours of

additional effort per week when a regular workweek for the taxpayer

consists of only 40 hours. Accordingly, I would permit the instant

deduction whenever a taxpayer could prove that he expended more than

an incidental amount of effort in his home office.

The majority’s position is far too sweeping in its denial of deductions

for ordinary and necessary business expenses. Many peripheral decisions

by employees take convenience into consideration, but its presence in the

decision-making process does not.alter the nature of the work being

performed. I think the majority has unduly relied upon this element in

reaching its decision.

Certainly the most appropriate solution to this controversy would be

an unequivocal statement from the Congress. Section 162(a) was drafted

and enacted in general terms in accordance with a congressional

intention that the judiciary give more concrete meaning to those terms

on a case-by-case basis. Nevertheless, when cases turn on congressional

intent and the judiciary cannot agree, Congress should step in and

resolve the issue. If a new and more restrictive test for business expenses

is needed, then it should be imposed by the Congress, not by the

judiciary.

STERRETT and GOFFE, JJ., agree with this dissent.

Scott, J., dissenting: I respectfully disagree with the conclusion of

the majority that the $25 license fee paid by petitioner to New York, the

$571 paid to take the California bar examination, the $11 for admission

18 Appendix

Tx Court Regular Decisions

JOEL A. SHARON

to practice before two Federal courts in California, and the $313.35 paid

for travel to Washington, via New York, to practice before the United

States Supreme Court are properly amortizable over petitioner's life

expectancy. I agree that these expenditures, except for transportation to

Washington, via New York, the place of the home of petitioner’s family,

are capital expenditures. However there is nothing in this record to show

the reasonable useful life of these expenditures. How long petitioner will

practice law and where are so conjectural as to cause there to be no way

to ascertain the reasonable useful life of the asset petitioner acquired

through his capital expenditures. Although respondent apparently makes

no contention that the trip to Washington, via New York, when

petitioner was admitted to practice before the Supreme Court was

personal, the clear inference from the fact that he did go to New York

where his family lived before coming to Washington and returned there

after he came to Washington is that petitioner went to New York to visit

his family and incidentally came to Washington to be admitted to

practice before the Supreme Court. However, if the view.of the majority,

that the cost of travel to Washington, via New York, was properly part

of the cost of petitioner's admission to practice before the Supreme

Court, were proper, then this, as the other capital expenditures, should

not be amortizable since the useful life of the asset acquired is not

reasonably ascertainable.

STERRETT, J., agrees with this dissent.

IRwIN, J., dissenting: I disagree with that portion of the majority

opinion which holds that petitioner may not treat the payment for the

California bar review course as a part of the cost of acquiring his license

to practice law in California. In the past, we have indeed adopted a

“commonsense approach” in determining whether an educational

expenditure qualifies a taxpayer for a new trade or business. Kenneth C.

Davis, 65 T.C. 1014, 1019 (1976); William D. Glenn, [Dec. 32,613], 62

T.C. 270, 275 (1974), Ronald F. Weiszmann, [Dec. 29,765], 52 T.C.

1106, 1110 (1969), affd. [71-1 USTC 99312], 443 F.2d 29 (9th Cir.

1971). However, I think we depart from that approach when we hold

that an attorney, licensed to practice law in New York, qualifies for a”

new trade or business when he obtains a license to practice law in

California. In William D. Glenn, supra at 275, we stated:

We have not found a substantial case law suggesting criteria for determining when

the acquisition of new titles or abilities constitutes the entry into a new trade or business

for purposes of section 1.162-5(c1), Income Tax Regs. What has been suggested, and we

uphold such suggestion as the only commonsense approach to a classification, is that a

comparison be made between the types of tasks and activities which the taxpayer was

qualified to perform before the acquisition of a particular title or degree, and those which

he is qualified to perform afterwards. Ronald F. Weiszmann, 52 T.C. 1106, 1110 (1969),

affd. 443 F.2d 29 (C.A. 9, 1971). Where we have found such activities and abilities to be

significantly different, we have disallowed an educational expense deduction, based on

our finding that there had been qualification for a new trade or business. Ronald F.

Weiszmann, supra. [Emphasis supplied. ]

Appendix 19

Tax Court Regular Decisions

GENE P. GREEN

In my view there is no difference in the types of tasks and activities

which petitioner was qualified to perform before and after he acquired

his California license. By virtue of being licensed to practice in

California, petitioner could perform the same types of tasks and

activities in that state as he was already qualified to perform in New

York. In this regard, respondent takes the position that once an

individual is qualified to teach in State A, a college course taken in order

to qualify for a teaching position in State B is neither a minimum

educational requirement of his trade or business nor education qualifying

him for a new trade or business. Rev. Rul. 71-58, 1971-1 C.B. 55. I would

similarly conclude that once an individual is qualified to practice law in

one State, a bar review course taken in preparation for the bar exam of

another State is not education leading to qualification for a new trade or

business.

STERRETT, J., dissenting: I disagree with the majority’s conclusion

that the costs incurred by petitioner in acquiring the licenses involved

herein are amortizable over his life expectancy. Although the fees in

question are undoubtedly business related, it seems clear to me that the

realities of life preclude any rational method by which the useful life

thereof can be estimated with any reasonable accuracy. As the majority

recognizes at page —, ‘Furthermore, when an attorney commences the

practice of law, it is impossible to anticipate where his work will take

him. He cannot with certainty establish what work he will recieve and

what bar memberships will be useful to him.” What the licenses do is

afford petitioner the opportunity to earn fees for appearances in court for

an indefinite period of time; namely until his retirement or withdrawal

from practice, his death, or in the case of the State licenses his

commencement of practice in another State, whichever event occurs

first. Such indefiniteness should preclude amortization of the cost of the

licenses. Formico v. Commissioner, [74-1 USTC 9247], 491 F.2d 788

(9th Cir. 1974); Ralph Vander Hoek, 51 T.C. 203 (1968).

To allow the deductions for amortization of these fees is a triumph of

the esoteric over the practical.

ScoTT, J., agrees with this dissent.

Appendix 21

Appendix B

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Joe, A, SHaron and Ann L. SHaron,

Petitioners,

ba No. 77-1324

CoMMISSIONER OF INTERNAL REVENUE,

Respondent.

Opinion

Filed 11/24/78

On Appeal from a Decision of the

United States Tax Court

Before: BROWNING and CHOY, Circuit Judges, and

CHRISTENSEN*, District Judge

PER CURIAM:

The Tax Court determined Joel Sharon was not entitled

to deduct expenses he incurred in maintaining an office in

his home, and was not entitled to amortize expenses incur-

red in obtaining a college degree and a law school degree

or expenses incurred in taking the California and New York

bar review courses. 66 T.C. 515 (1976). The Tax Court

*Honorable A. Sherman Christensen, Senior United States Dis-

trict Judge for the District of Utah, sitting by designation.

22 Appendix

also held it was without authority to award Sharon costs

incurred in filing his Tax Court petition. We affirm.

During 1969 and 1970, Sharon set aside one room of his

three-bedroom apartment for use as an office. The room

was used in performing work in connection with Sharon’s

employment as an attorney, and with investments in prop-

erty held for the production of income. It was also used for

reading and reviewing professional books, journals, and

other publications, and for handling personal correspon-

dence. Occasionally the room was left open to allow use

by guests when Sharon entertained a large group. Sharon

kept no records on the proportion of time he used the room

in connection with his employment.

Sharon’s employer did not require him to maintain an

office at home and provided him with keys to his down-

town office so he could work there after normal hours.

Sharon, however, found it more convenient to work at home.

If he stayed late at the office he had to eat at a restaurant.

In addition, the trip home was more difficult; trains and

buses ran less frequently, and his wife could not meet him

with the car at the train station.

We agree with the Commissioner and the Tax Court

that, in these circumstances, Sharon’s expenses were per-

sonal and therefore nondeductible under section 262 of the

Internal Revenue Code. Bodzin v. Commissioner, 509 F.2d

679 (4th Cir. 1975). See Commissioner v. Idaho Power Co.,

418 U.S. 1, 17 (1974). Sharon was not required to main-

tain a home office because of the nature of his employment

or because there was not adequate space at the employer’s

place of business. Compare Richard Keith Johnson, 41

T.C.M. (P-H) 983 (1972); Christopher A. Rafferty, 40

T.C.M. (P-H) 887 (1971); Herman E. Bischoff, 35 T.C.M.

(P-H) 603 (1966). Nor did logistical problems peculiar to

Appendix 23

Sharon’s duties necessitate the home office, Compare Newt

v. Commissioner, 432 F.2d 998, 1000 (2d Cir. 1970) ;? rather,

the home arrangement was adopted by Sharon to make

working in the evening more pleasant and convenient.

In the Tax Court, Sharon argued he should be permitted

to deduct the cost of his college and law degrees, bar re-

view courses, bar exam and court-admittance fees, and re-

lated expenses as business expenses, or to amortize the

expenditures under section 167 as costs of obtaining a cap-

ital asset (his license to practice law) used in his trade or

business. The Tax Court held none of the expenditures

were deductible business expenses, and that Sharon could

amortize the cost of his bar fees but not his educational

expenses or the cost of his bar reyiew courses. 66 T.C. at

525-30. The Tax Court also held that he could amortize his

court-admittance fees. 7d. at 530-32. On this appeal Sharon

argues that he is entitled to amortization of the costs of

the college and law degrees and bar review courses. He

abandons the argument that he is entitled to deduct his edu-

cational expenses as business expenses under section 162.

We agree with the Tax Ceurt that Sharon’s college, law

school, and New York bar review expenses were personal

expenditures directed toward his minimum educational

requirements, and therefore nondeductible. Treas. Reg.

§ 1.162-5(b) (1958), amended, T.D. 6918 (1967). See Weisz-

man v. Commissioner, 52 T.C. 1106 (1969), aff’d per curiam,

443 F.2d 29 (9th Cir. 1971). We also agree that allocation

of these expenses between the nondeductible personal com-

1, Under the Code, as amended by the Tax Reform Act of 1976,

Sharon would be precluded from deducting the expenses of his

home office unless he used it exclusively on a regular basis as his

principal place of business or exclusively and regularly to meet

with clients for the convenience of the emplover. This provision

does not apply to this appeal, which involves taxable years 1968 and

1969. 26 U.S.C. § 280A(e) (1) (1976).

24 Appendix

ponent and any deductible capital component wouid not be

feasible. See Fausner v. Commissioner, 413 U.S. 838, 839

(1973). Thus, like the Tax Court, we conclude that the

amortization deduction was precluded by the proscription

of section 262, which “take[s] precedence” in the circum-

stances over the amortization provision of ‘section 167.

Commissioner v. Idaho Power Co., supra, 418 U.S. at 17.

In 1967, Sharon accepted a position with the Internal

Revenue Service in San Francisco. Although he was not

required to become a member of the California bar by the

IRS, he was encouraged to do so and did, after taking an-

other bar review course. The Tax Court held that he could

not amortize the costs of his California bar review course

because it was incurred in pursuit of “a new trade or busi-

ness.” Treas. Reg. § 1.162-(5)(b)(3) (1958), amended, T.D.

6918 (1967)?

The Tax Court’s determination is correct. Sharon was

not qualified for private practice in California. His job

did not require him to be. Consequently, the expenses in-

curred for the bar review course allowed him to represent

California clients and to pursue private practice rather

than to continue practice as an IRS attorney. As the Tax

Court coneluded, this qualified Sharon to perform signifi-

eantly different tasks and activities than he could have

performed prior to the course.

Sharon requested an award as costs of the fees paid to

the Tax Court for filing his petition. The Tax Court held

it lacked the statutory authority to make these awards.

2. The Tax Court cited Davis v. Commissioner, 65 T.C. 1014

(1976) (professor of social work is in a different trade or business

than a social case worker); Glenn v. Commissioner, 62 T.C. 270

(1974) (licensed public accountant is in a different trade or busi-

ness than a certified public accountant), as support for its holding.

66 T.C. at 528-29,

Appendix 25

Costs may be imposed against the government under 28

U.S.C. § 2412, which provides:

Except as otherwise specifically provided by statute,

a judgment for costs as enumerated in section 1920 of

this title but not including the fees and expenses of

attorneys may be awarded to the prevailing party in

any civil action brought by or against the United

States or any agency or official of the United States

acting in his official capacity, in any court having jur-

isdiction of such action.

28 U.S.C. § 2412 (emphasis added). At oral argument,

Sharon conceded that he was not the “prevailing party.”

He therefore is not entitled to an award of filing costs.°

The judgment of the Tax Court is affirmed.

3. Under 28 U.S.C. § 1920, “[a] judge or clerk of any court of

the United States may tax as costs” various fees. The Tax Court

held that it lacked statutory authority to award costs because it is

not a “court of the United States” under 28 U.S.C. § 451 (1976).

See 66 T.C. at 533-34. ,

In view of our determination that Sharon was not the “prevail-

ing party,” we need not determine whether the Tax Court might

have had authority to award costs to Sharon.

26 Appendix

OFFICE OF THE CLERK

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Notice of Entry of Judgment

Please take notice that the judgment was filed and entered

in the case noted on the attached disposition (opinion, mem-

orandum or order). Also, please take special notice of the

date of filing as it represents the date of entry of judgment.

Important Time Periods

There are fourteen (14) days from the date of entry of

judgment in which to file a petition for rehearing. The man.

date of the court shall issue twenty-one (21) days after the

entry of judgment unless the court orders otherwise. If the

court enters an order denying the petition, the mandate

will issue (7) days thereafter. For further information re-

garding these processes, please refer to Rules 36, 40 and 41

of the Federal Rules of Appellate Procedure.

Appendix 27

Appendix C

Internal Revenue Code of 1954 (26 U.S.C.) :

SECTION 162. TRADE OR BUSINESS EXPENSES.

(a) In General.—There shall be allowed as a deduc-

tion all the ordinary and necesary expenses paid or

incurred during the taxable year in carrying on any

trade or business, including—* * *

SECTION 167. DEPRECIATION.

(a) General Rule.—There shall be allowed as a de-

preciation deduction a reasonable allowance for the

exhaustion, wear and tear (including a reasonable

allowance for obsolescence )—

(1) of property used in the trade or business, or

(2) of property held for the production of income.

SECTION 212. EXPENSES FOR PRODUCTION OF

INCOME.

Tn the case of an individual, there shall be allowed as

a deduction all the ordinary and necessary expenses

paid or incurred during the taxable year—

(1) for the production or collection of income;

(2) for the management, conservation, or main-

tenance of property held for the production

of income; or * * *

SECTION 262. PERSONAL, LIVING, AND FAMILY

EXPENSES.

Except as otherwise expressly provided in this

chapter, no deduction shall be allowed for personal,

living, or family expenses.

28 U.S.C.:

SECTION 2412. COSTS.

- Except as otherwise specifically provided by statute,

a judgment for costs, as enumerated in section 1920

Appendiz

of this title but not including the fees and expenses

of attorneys may be awarded to the prevailing party

in any civil action brought by or against the United

States or any agency or official of the United States

acting in his official capacity, in any court having juris-

diction'of such action. * * *

Treasury Regulations on Income Tax (1954 Code) (26

C.F.R.):

SECTION 1.167(a)-3. INTANGIBLES.

If an intangible asset is known from experience or

other factors to be of use in the business or in the

production of income for only a limited period, the

length of which can be estimated with reasonable accu-

racy, such an intangible asset may be the subject of

a depreciation allowance, * * *

SECTION 1.262-1. PERSONAL, LIVING AND FAM-

ILY EXPENSES.

(a) In general. In computing taxable income, no

deduction shall be allowed, except as otherwise ex-

pressly provided in chapter 1 of the Code, for personal,

living, and family expenses.

(b) Examples of personal, living, and family ex-

penses. Personal, living, and family expenses are illu-

strated in the following examples :

(3) Expenses of maintaining a household, including

amounts paid for rent, water, utilities, domestic service,

and the like, are not deductible. A taxpayer who rents

a property for residential purposes, but incidentally

conducts business there (his place of business being

elsewhere) shall not deduct any part of the rent. If,

however, he uses a part of the house as his place of

business, such portion of the rent and other similar

expenses as is properly attributable to such place of

business is deductible as a business expense.