Charles E. & Sandra A. Anderson - Page 6

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               In the above calculations, petitioners treat the Inn as what           
          they refer to as a “commercial structure,” and petitioners do not           
          apply the exclusive-use limitation of section 280A(f)(1)(B) to              
          the dual-use portion of the Inn.                                            
               On audit, because petitioners used a portion of the Inn as             
          their personal residence, respondent applied the exclusive-use              
          limitation of section 280A(f)(1)(B) and disallowed all business             
          deductions relating to the dual-use portion of the Inn.                     
          Respondent recalculated allowable depreciation and interest                 
          deductions relating to the bed and breakfast business based on an           
          allocation factor of 77 percent (i.e., the portion of the Inn               
          used exclusively in the business).                                          

                                      Discussion                                      
               Section 280A(a) provides a general disallowance rule for               
          expenses relating to a “dwelling unit” that is used as a personal           
          residence of the owner taxpayer.  Section 280A(a) provides                  
          generally as follows:1                                                      

               Except as otherwise provided in this section * * * no                  
               deduction * * * shall be allowed with respect to the                   
               use of a dwelling unit which is used by the taxpayer                   
               during the taxable year as a residence.                                

               For purposes of section 280A, a dwelling unit is treated as            
          used as a taxpayer’s residence if the taxpayer uses the dwelling            


               1  Certain exceptions to the general disallowance rule of              
          sec. 280A(a) are not applicable to the issue before us.                     




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