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Rent paid by proprietor to spouse is deductible.

An attorney who filed taxes as a sole proprietor paid rent to his wife for her one-half ownership in the building his law practice occupied (the building was owned one-half by each spouse). While this transaction was a wash for income tax purposes in the couple's joint return, it reduced the husband's self-employed Social Security tax.

The IRS argued that, under revenue ruling 74-209, the husband's business expense could be claimed only if the spouses filed separate returns. The Tax Court, however, allowed the husband to deduct as a business expense the rent he paid his wife for her share of the building. But the court ruled no deduction could be claimed for the husband's one-half share on the law practice's schedule C (Cox v. Commissioner, TC memo 1993-326).

Observation: The court rejected the IRS's argument, finding joint returns posed no barrier to the deduction. The court concluded revenue ruling 74-209 involved an incidental fact (that a husband and wife filed separately) that did not affect the deductibility of rent paid by the proprietor.
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Oct 1, 1993
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