ADA, OKLA., August 26, 1980.

COMMISSIONER OF INTERNAL REVENUE,

Washington, D.C.

(Attention: CC:LR:C (LR-261-76)).

DEAR COMMISSIONER: Although I cannot come to Washington for the public hearings on the proposed regulations covering Home Office and Home Business Use Deductions, I would like to express my disagreement to Proposed Regulation 1.280A-2(b).

I disagree with the IRS's position that an individual can have only one principal place of business. It is my opinion that an individual can have several businesses, each having a principal place of operation. If Congress had intended for only a person's principal business to qualify for the home office deduction, I believe Congress would have used the term “principal business" rather than "principal place of business". The only official reference I can find concerning the definition of principal place of business is TD 2090, December 14, 1914. This reference deals with a corporation's principal place of business and does not apply to an individual's principal place of business.

In my specific case, I am a college teacher and also operate a private accounting practice from my home. I have a room used 100 percent of the time as an accounting office. In terms of total income, approximately 30 per cent comes from my accounting practice. My accounting practice is not my principal business, but my home office is the principal place of business for my accounting practice.

In summary, I believe there is a difference between the terms "principal place of businesss" and "principal business". Each individual probably has only one principal business, however, each business a person operates has a principal place of business for that specific business. In my opinion Congress did not intend to make the Home Office deduction as restrictive as the proposed regulations do. The fact that your home office must be a separate room used exclusively for business purposes, and that your home office must be your principal place of operating a specific business are the restrictions I believe Congress intended. Your consideration of this position will be appreciated. Respectfully submitted.

WILLIAM C. CHAPMAN, Certified Public Accountant.

WASHINGTON, D.C., February 17, 1981.

Hon. ROBERT DOLE,

U.S. Senate, Washington, D.C.

DEAR SENATOR DOLE: I understand that the Senate Finance Committee has scheduled a hearing on S. 31 for February 23. I would like to add my support to that section of the bill which would require equitable tax treatment for lessors who rent property to a member of their family.

I would also like to respectfully recommend a minor amendment which merely extends the reasoning behind that portion of S. 31 to a situation that affects many other taxpayers. I believe the inequity in these cases is even more compelling than the inequity S. 31 would rectify.

In my situation, which is by no means unique, a partner and I purchased a condominium. It is not a vacation home. It is my permanent residence. I pay him market value rental for the equivalent of one-half of the unit. However, a clause in the Internal Revenue Code (Section 280(A)(2)(A))—the section S. 31 amends, apparently denies him the same tax privileges any other investor enjoys. The clause, which immediately precedes "or by any member of the family . . .", reads, "or any other person who has an interest in such unit.'

The deletion of this clause would prevent the anomaly of allowing routine tax incentives to a family member but denying them to a non-relative. In my case, by the way, the change would have no effect on me-the resident-but would provide equitable treatment for my partner.

For purposes of equitable tax treatment the key, whether dealing with family members or others, is whether a fair rental is charged. as long as that requirement remains in the tax laws there can be no avoidance of Congressional intent.

If it is felt that an additional safeguard is needed, adding the requirement that the lessee must be the permanent resident would not adversely affect our situation. The effect of making this additional change in the Code would be to prevent the inequitable treatment of an owner who has "an interest in such unit" just as S. 31 would prevent the inequitable treatment of a "family member."

In addition to providing equal treatment for taxpayers, the change should also have other beneficial effects. It should encourage investment, particularly investment by small investors. And it should allow low and moderate income people to purchase homes where they might otherwise be prevented from doing so due to the extremely high costs of homes and high interest rates.

I would be pleased to have this letter entered into the hearing record and to discuss this letter with you or your staff should you so desire.

Sincerely,

CHARLES E. SANDLER.

Senator ARMSTRONG. Mr. Olson, I have often said that I could not remember the last time I heard a new idea advanced at a committee meeting. I congratulate you for bringing in a new idea. Mr. OLSON. Thank you, sir.

Senator ARMSTRONG. Usually I find that the function of meetings such as this is to make a record and for people to articulate, sometimes very forcefully and very well and in great detail and with scholarship and precision, and so on, ideas which have been previously surfaced in some other place.

I agree with the chairman that you raised a point which absolutely had not occurred to me. I instantly can imagine a parade of other professions who are similarly affected.

While I have not thought it through, your comment appeals to me on equitable grounds. I am not sure whether or not it is really practical to address the concern that you have raised, but my intent would be to at least consider that and see how many other professions might be affected and also to determine what the revenue implications would be if we got a new group of taxpayers suddenly taking deductions.

I thank you for raising that issue.

Mr. OLSON. We will be very happy to assist you in any way possible in that endeavor. This is an issue which is by no means new to us. It is something which has been on our books. Our members have been fighting with the IRS about this for some time. Therefore, we are very pleased that you are so receptive to this. We understand that this does somewhat go beyond what you perceived to be the purview of this bill. However, we feel that it does deal with a problem of equity, and we encourage you to do so.

I would like to make one statement that I think is important, that is, that there is a problem that some of our teachers have or could well have in terms of the deduction of a space which is used for secondary income in that they have to be doing something conscientiously other than just making pin money.

It is important that many professionals-teachers are not the only ones-need the money in order to survive. It may well be only a fourth or less of his total income, but it is that fourth that may well buy a few of the niceties that people enjoy today.

Therefore, when we look at that it might be important in the record of the committee and in the report to stress that it is not for just 50 percent of the time or something such as that, but there is indeed an effort on the part of the taxpayer, which there is on the part of teachers, in terms of making this a conscientious part of their endeavor.

Senator ARMSTRONG. If I understand Mr. Olson's point correctly, it is addressed in the bill, although I defer to counsel.

Your point is, I think, there is no percentage test.
Mr. OLSON. That is right.

Senator ARMSTRONG. Someone might make 90 percent or 95 percent of their income, say, from a regular job.

Mr. OLSON. That is correct.

Senator ARMSTRONG. But they might be a member of Mr. Blum's Direct Selling Association. They might have a job as a part-time economic endeavor which might not produce 25 or 40 or any particular percentage of their income, but yet, nonetheless, qualify under this bill.

Unless counsel advises to the contrary, I think that is covered. Mr. OLSON. I suspect the two of us would be interested in finding out the number of people that are members of his and my organizations. I suspect it is substantial.

Senator ARMSTRONG. Maybe you ought to merge the two associations.

I am grateful for the testimony we have had this morning. I think it is great.

However, I cannot resist the temptation in closing to point out to Mr. Olson the fact that he has brought a new idea to this subcommittee. Yet, it is something which his association and its members have so long been familiar with. It just proves what NEA has long contended, that is, that Senators are notoriously slow learners. Thank you, Mr. Chairman.

Senator PACKWOOD. Let me also congratulate you for keeping your testimony under 5 minutes. I have long contended that intelligent people can say what they have to say in 5 or 10 minutes if they are forced to do so and if they have to think about it.

In past years we have listened to statements going on and on without cutting them off. I think the speaker probably in 20 or 25 minutes failed to make the point that he or she wanted to make because of the length of the statement.

Mr. PENICK. Your traffic light helped focus our attention. [The prepared statements of the preceding panel follow:]

Mr. Chairman and members of the Committee:

My name is Gil Thurm. I am Vice President and Legislative Counsel in the Government Affairs division of the NATIONAL ASSOCIATION OF REALTORS®. This Association, with over 700,000 members, is the largest trade association in the United States. Our membership is involved in all facets of the real estate residential, commercial, industrial and farm real

industry

estate.

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We appreciate the opportunity to express our strong support for S. 31, introduced by Senator William Armstrong (R-CO) and cosponsored by Senators Dole, Poren, Mathias, Goldwater and Exon. This bill which would provide much needed clarity with respect to the deductibility of expenses attributable to home offices and would repeal the discriminatory anti-family provision that has come to be called the "family rental tax."

ENACTMENT OF THIS BILL IS URGENTLY NEEDED

The Tax Reform Act of 1976 contained a number of provisions designed to prevent taxpayers from deducting as business expenses a number of costs that were in reality personal expenses. Among these provisions were limitations with respect to the personal use of a rental property by the taxpayer, offices in the home, and the use of vacation homes. These limitations are now contained in section 280A of the Internal Revenue Code. On August 7, 1980, the Internal Revenue Service issued proposed regulations that set forth a number of additional limitations that appear to