RV is Dwelling Unit Used as Residence so Business-related Depreciation and Interest Deductions Denied

(Parker Tax Publishing February 2017)

The Ninth Circuit affirmed a Tax Court decision that a couple couldn't deduct business expenses for their recreational vehicle (RV). Although expenses for the RV were "appropriate and helpful" in selling insurance policies at RV rallies, the RV was a dwelling unit used as a residence and the taxpayers were prohibited by Code Sec. 280A from deducting the expenses. Jackson v. Comm'r, 2017 PTC 11 (9th Cir. 2017).

Background

Dellward Jackson owned and operated an insurance brokerage business, with his spouse also active in the business as an agent and officer. In 2004, the agency began selling recreational vehicle (RV) policies once the Jacksons recognized that traditional auto insurance policies were not well suited for higher end RVs.

The Jackson's interest in RVs did not begin in 2004. They joined their first RV club in 1995. The clubs held rallies about once a month, and during 2004, the Jacksons began attending the rallies not just for pleasure but for business purposes, too. They would set up a table outside their RV or the clubhouse, if the site had one, and attach a banner advertising Dell Jackson Insurance to the RV or table. They would gather information from potential clients, return to their office to generate rate quotes, and bring the policies to the next rally for clients to review and hopefully sign.

On their 2006 tax return, the Jackson's deducted $47,461 for depreciation on their 2004 Winnebago. While they claimed 100% business use for the RV for 2006, the Jacksons admitted at trial that they took two or three personal trips in the RV during the year. In 2007, the couple purchased a new Winnebago, and on their 2007 return, deducted $60,424 for depreciation based on 99.95% business use. They also deducted as a business expense the interest paid to finance the new Winnebago. Because of Mrs. Jackson's health, they took no personal trips during 2007.

In its notice of deficiency, the IRS disallowed the depreciation deductions for both years and also disallowed the 2007 interest expense as a business expense. The Tax Court agreed with the IRS's determinations for both years, and the Jacksons appealed the decision to the Ninth Circuit Court of Appeals.

Analysis

Code Sec. 167(a) authorizes depreciation deductions for property used in a trade or business or held for the production of income and Code Sec. 163(a) allows a deduction for interest paid or accrued on taxpayer debt. However, Code Sec. 262(a) disallows deductions for personal expenses, Code Sec. 163(h) prevents noncorporate taxpayers from deducting personal interest, and Code Sec. 280A prohibits taxpayers from deducting expenses for dwelling units used as a residence unless the expenses are allowable without regard to the taxpayer's business or income-producing activity.

According to the Tax Court, when determining whether property is used in a trade or business or held for the production of income, the proper focus is "whether the acquisition and/or maintenance of the property was primarily associated with profit-motivated purposes." If the expenses are primarily motivated by personal considerations, Code Sec. 262 prohibits a deduction. Where substantial personal and substantial business motives coexist, the court can allocate the expenses between personal and business use.

The Tax Court framed the issue as whether the Jacksons used their RV for business or pleasure when attending the RV rallies. The "social aspect of these rallies" was evident from the fact that the Jacksons attended rallies for at least nine years before using the rallies as a business venue, and continued attending rallies once they sold their insurance business and retired. Nevertheless, it was clear that the Jacksons sold insurance policies during their time at the rallies and their business activities generated not-insignificant revenue ($14,882 in 2006 and $19,446 in 2007) that tripled during the four years after they began soliciting business at the rallies. Accordingly, the court determined that allocating a portion of the depreciation and interest to business use was appropriate.

The Tax Court then considered Code Sec. 280A(a), which disallows deductions for a dwelling unit used during the year as a residence. After concluding that the RV was akin to motor homes held to be dwelling units in Haberkorn v. Comm'r, 75 T.C. 259 (1980) and other cases, the court sought to determine whether it qualified as a residence under Code Sec. 280A(d). Under that provision, a dwelling unit is a residence for the year if used for personal purposes during the year for the greater of 14 days or 10 percent of the number of days during the year the unit is rented at a fair rental. Since the Jacksons did not rent their RV but used it for personal purposes for more than 14 days during the year, Code Sec. 280A prohibited any deductions in 2007.

Code Sec. 280A(c) contains a number of exceptions to the general disallowance rule, including one allowing an allocation of costs to a certain portion of the dwelling unit. But for the exception to apply, a portion of the dwelling unit must be exclusively used on a regular basis as the principal place of business or as a place to meet or deal with customers or clients. Since the Jacksons did not use any portion of their RV exclusively for business, they did not qualify.

Ninth Circuit Affirms Tax Court

In a brief opinion, the appellate court agreed that the deductions were prohibited by Code Sec. 280A, stating that the Tax Court did not clearly err in finding that the Jacksons used their RV for personal purposes for more than 14 days in 2006 and 2007. The Tax Court also did not clearly err in finding Code Sec. 280A(c)(1)(B) inapplicable because the Jackson's RV failed the "exclusively used" test.

Returning to the Tax Court's opinion, the judge acknowledged that the result may seem harsh but reflects Congress' desire to prevent the deduction of personal expenses as business expenses. Code Sec. 280A casts a wide net and sometimes catches taxpayers, like the Jacksons, who had a genuine business purpose. While the use of the RV may have been "appropriate and helpful" in their business, they failed to meet the stringent requirements of Code Sec. 280A.

For more on deductions attributable to the use of a dwelling unit, see Parker Tax ¶86,101.

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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