ER Doc Cannot Deduct Condo Costs as Office Expense

(Parker Tax Publishing January 2022)

The Tax Court held that an emergency room doctor could not deduct $18,000 of his condominium expenses as office expenses because (1) his office was not a separate structure from his dwelling unit; (2) the doctor did not meet with patients in his office; (3) the only home office meetings the doctor had were with IRS agents; (4) the doctor did not submit any contracts from the hospital showing he did not have office space at the hospital or submit any other documentation that office space was needed for his job; and (5) he could not prove that his home office satisfied the "principal place of business" test in Code Sec. 280A(c)(1)(A). Among other disallowed expense deductions, the court rejected expenses relating to a trip to Cairo for a seminar because the doctor did not meet the strict substantiation requirements of Code Sec. 274(d) required to deduct such expenses. Elbasha v. Comm'r, T.C. Memo. 2022-1.

Background

Mohamed Elbasha worked as a contract emergency room doctor at Murray Medical Center between June or July 2007 and 2010. Murray Medical Center is in Chatsworth, Georgia, approximately 177 miles round trip from Elbasha's condominium. Elbasha did not see patients at any facility other than Murray Medical Center during 2008 and 2009 and, for 2008 and part of tax year 2009, he reported the income and expenses related to his medical practice on Schedules C.

On the basis of his experience in the United States, Elbasha decided to start a business overseas staffing emergency room physicians. He deducted, as cost of goods sold for 2008 and 2009, payments made in cash or through Western Union totaling $32,580 and $28,320, respectively. While Elbasha turned to Sari Abdelwahab to help with this venture and made payments to Mr. Abdelwahab, he never received any jobs through Mr. Abdelwahab. The IRS disallowed these deductions in full.

Elbasha reported other expenses of $36,897 on his 2008 Schedule C, including $27,610 of continuing education expenses. Documentation for these expenses included charts listing the following continuing education expenses: $13,749 spent on "Critical Care of Tropical Diseases" in Khartoum, Sudan; $12,015 spent on "Practi-Med: Critical Care" in Dubai, United Arab Emirates; $847 spent on "Chronic Heart Failure" in London, United Kingdom; and $1,000 spent on "Kaplan Medical Course" in Atlanta. The costs of trips to Khartoum and Dubai each included the following categories of expenses, with specific subtotals: registration, flights, accommodations, meals, medical, materials, gifts, entertainment, transportation, and miscellaneous. The IRS disallowed $18,536 of the continuing education expenses.

Elbasha deducted $18,000 for rent/lease - other business property expense on his 2008 Form 1040. This deduction related to the use of his condominium as a home office. He testified that he had no office at Murray Medical Center and so exclusively used one room in, or 50 percent of, his condominium to do paperwork related to his emergency room duties. He did not contend that he met with patients in his condominium. In court, he provided a chart that listed the hours each month he worked at home but could not explain how these hours translated to $18,000.

Elbasha also deducted $14,524 for travel expenses on his 2008 Form 1040. The deduction represented $3,861 for hotels near Murray Medical Center; $3,951 for items used for travels; and $6,712 for a business meeting at Cairo Alsalam Hospital in Cairo, Egypt. Elbasha provided a chart showing his monthly hotel and travel items expenses. A second chart showed his Cairo expenses, which included costs for the flight, accommodation, meals, materials, limousine, entertainment, and gifts. The IRS disallowed $12,021 of those expenses.

Elbasha also claimed a car and truck expense deduction of $20,091 on his 2008 Form 1040 for 36,864 miles driven that year. He provided a chart showing 30,125 miles driven between his condo and Murray Medical Center and 6,739 miles driven to a library, usually the Northwest Regional Library in Chatsworth during the 2008 tax year, but did not maintain a contemporaneous mileage log. The IRS allowed $6,801 of this deduction.

Elbasha was married at the close of the 2008 tax year but his wife lived abroad. He thus maintained that he was eligible to use the single filing status in 2008 and, in 2009, he filed his return using head of household filing status.

Analysis

The Tax Court disallowed most of Elbasha's deductions as a result of Elbasha failing to offer sufficient substantiation for the deductions. With respect to Elbasha's filing status, the Tax Court agreed with the IRS that Elbasha could not use the single filing status and granted the IRS's motion to increase his tax deficiency due to a change in filing status. However, the court noted that a person may file as a head of household only if the individual is not married at the close of the tax year. And, the court said, for purposes of the head of household filing status, a taxpayer is not considered married at the close of the tax year if that person's spouse is a nonresident alien. Elbasha had testified at trial that at the end of 2009, he was married but his wife, an alien, was not present in the United States. Because the IRS provided no evidence to refute Elbasha's testimony, the court held that the IRS did not meet its burden of proof, and denied the IRS's motion to increase Elbasha's tax deficiency due to a filing status change for tax year 2009.

The Tax Court also held that Elbasha could not deduct 50 percent of his condominium expenses as office expenses because (1) the office was not a separate structure from his dwelling unit; (2) Elbasha did not meet with patients in his office; (3) the only home office meetings he had were with IRS agents; and (4) he did not submit any contracts from the hospital showing he did not have office space or submit any other documentation that office space was needed for his job. The court further noted that Elbasha could not prove that his home office satisfied the "principal place of business" test in Code Sec. 280A(c)(1)(A), under which a taxpayer can deduct costs incurred for maintaining a place used for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business. The doctor, the court observed, did not submit any contracts from the hospital showing he did not have office space or submit any other documentation that office space was needed for his job. The court cited its decision in Crawford v. Comm'r, T.C. Memo. 1993-192, in which it held that when most of the services a doctor performs for patients are performed at hospitals with some follow up at the doctor's home office, the home office does not constitute a principal place of business.

The court also found that Elbasha was not entitled to deductions for travel, including the trip to Cairo for a seminar, and car and truck expenses because those deductions failed to meet the strict substantiation requirements of Code Sec. 274(d).

The court also rejected Elbasha's deduction of $3,861 for hotels near Murray Medical Center. Once Elbasha had worked at Murray Medical center for a year, the court said, his work was no longer considered temporary and the lodging expense was no longer deductible. The court also denied deductions for mileage expenses for traveling back and forth to the Murray Medical Center after noting that such expenses are commuting expenses which are generally nondeductible.

Finally, the court noted that while Elbasha credibly testified that he relied on his tax preparer to prepare his return, there was no testimony or evidence as to the nature of the preparer's expertise or competence, nor was there any testimony as to the information Elbasha provided to the preparer. Thus, the court found that Elbasha was liable for the Code Sec. 6662 penalties assessed by the IRS.

For a discussion of the criteria that must be met in order to deduct home office expenses, see Parker Tax ¶85,505. For a discussion of the documentation necessary for deducting business-related travel expenses, see Parker Tax ¶91,130.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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