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Planning for the home office deduction - after the Soliman case.

Planning for the Home Office Deduction -- After the Soliman Case

The recent decision by the Tax Court in the Soliman case increases the availability of the home office deduction for many self-employed taxpayers and some employees.(1) The purpose of this article is to analyze this case and to provide guidance for taxpayers who might be eligible for a home office deduction.

Prior to the Soliman decision expenses incurred in the use of the taxpayer's home for business purpose were considered deductible if related to a portion of the home used exclusively and regularly as either:

1. The principal place of

business of any trade of business

of the taxpayer.(2) 2. A place of business used by

patients, clients or customers

in meeting or dealing with

the taxpayer in the normal

course of their trade or

business. 3. A separate structure that is

used in taxpayer's trade

or business.

These three situations constituted what is commonly referred to as the "focal point" consideration of the Tax Court. Deductible expenses must be the focal point of business activity which is the principal place where goods and services are provided.(3) In the Soliman case, the court stated that it would no longer follow the focal point test for determining where the taxpayer's principal place of business activity was located.

Details of the Soliman Case

Dr. Soliman worked as an anesthesiologist at three hospitals. He performed all services for his patients at the three hospitals. None of the hospitals provided office space to him although Soliman spent 30 to 35 hours per week at the hospitals.

Soliman's personal residence was a three bedroom apartment, and one of the bedrooms was used exclusively as an office. Only items necessary for activities related to his anesthesiologist practice were maintained in the office. His office was used exclusively to:

1. Contact surgeons and patients

by phone. 2. Contact hospitals to arrange

admissions for his patients. 3. Maintain detailed billing

records and patient logs. 4. Transmit information to a

billing service. 5. Record collections on patients'

logs. 6. Read medical books and

journals. 7. Prepare for specific patients.

Soliman spent an average of two or three hours a day working in his home office but never treated patients at that location. The only personal use of the home office was to balance his checkbook which combined business and personal affairs.

The Internal Revenue Service disallowed the home office expense deduction claimed by Soliman. In disallowing the deduction, the IRS contended the home office was not the taxpayer's principal place of business. The Tax Court concluded that the determination of the principal place of business depends upon facts and circumstances as they pertain to individual cases. A principal place of business is not always where goods and services are transferred (the focal point treatment) but is often the administrative headquarters of a business. The Tax Court ruled in favor of Soliman and discarded the application of the focal point criterion in certain situations.

In reaching the decision, the Court considered several factors. First, Soliman's business required him to devote substantial time (over 30% of his work week) to office work in his home office. However, the Tax Court indicated that the time spent in the home office was not the critical factor in reaching the decision. They reasoned that when a taxpayer's business requires the performance of two different functions, a comparison of proportionate time spent in each task is not critical.

Second, the Tax Court considered the duties performed by Soliman in his home office to be both essential to his practice and distinctly different from tasks performed at the hospitals.

Third, the three hospitals did not provide Soliman with an office. He needed an office to do work essential to his practice. The Tax Court indicated that this third factor weighed significantly in Soliman's favor.

Therefore, there were three key factors considered by the Tax Court in reaching the decision:

1. No other home office space

was available for the taxpayer's

use. 2. The activities conducted in

the home office were

essential in order to conduct

business. 3. The taxpayer spent

substantial time working in the home


Tax Planning Issues

As a result of the Soliman case, several tax planning opportunities are available for taxpayers in similar situations.

1. The activities conducted in the home office must be essential to the taxpayer's business. Essential revenue would be forgone except for the office in the home.

2. The absence of other available office space weighed heavily in Soliman's favor and played a major role in the decision the Court reached. Therefore, taxpayers should structure their situation such that they have no alternative office space. One good approach would be for the taxpayers to obtain letters from their employers indicating that office space is not provided as a condition of their employment.

3. Taxpayers must be able to prove they spent a substantial amount of time in their home office. Documentation should be developed to prove the significant use of the home office. There is no specific proportion of the work week requirement for home office use.

4. The taxpayers must furnish the home office with furniture and fixtures that are appropriate for the business activity. Suggested documentation should include a detailed list of home office furnishings and pictures of the home office content.

Professionals in the health care industry on hospital staff, but not provided an office, could qualify for home office deductions. Real Estate agents and accountants may also now qualify. Professionals performing essential business tasks in their home office but providing services to clients elsewhere qualify for relief from the old focal point test. In fact, in Kabaku, the Court followed Soliman and held that a professional guitarist's home office, rather than the restaurant where he performed, was his principal place of business.(4)


The Soliman decision increases the opportunity for taxpayers to deduct expenses related to a home office. With the decision, the Tax Court stepped away from the focal point test and replaced it with a facts and circumstances test. In the future, individual taxpayers should do substantial essential work in a home office. They should also have no alternative office available in order to qualify for a home office deduction.

The Internal Revenue Service has announced it will not follow the opinion in Soliman and plans to appeal to the fourth circuit.(5) However, other circuits have been critical of the focal point test in past decisions.


(1)Soliman v CIR, 94 TC No. 3 (1990). (2)IRC Sec. 280A (C) (1) (A). (3)Baie v CIR, 74 TC 105 (1980). (4)Kahaku v. CIR, TCM 1990-34 (1990). (5)IR 90-55, 3/27/90.

Radie Bunn is a professor of accounting at Southwest Missouri State University and has published numerous articles in leading academic and professional journals including the National Public Accountant. Barry Lewis is a professor of accounting at Southwest Missouri State University and has published numerous articles in leading academic and professional journals including the National Public Accountant. Steve McDuffie is an assistant professor of accounting at Southwest Missouri State University and has published articles in various professional journals.
COPYRIGHT 1990 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Bunn, Radie; Lewis, Barry; McDuffie, Steve
Publication:The National Public Accountant
Date:Oct 1, 1990
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