802 members may recall that, in the early 1980s, ICSOM sponsored a lawsuit on behalf of a number of Metropolitan Opera Orchestra musicians whose income tax deduction for practice space in their home had been denied by the IRS (Drucker vs. Commissioner of Internal Revenue Service, 715 F. 2d. 67 (Second Circuit. 1983).
In that case, the musicians took a tax deduction for a portion of the rent on their apartments on the ground that the Met Opera did not provide them with a practice studio and, of course, they needed to practice for their livelihood. In tax law, this is referred to as the “home office deduction.”
The Met musicians demonstrated that they devoted a portion of their apartment exclusively to musical study and practice, and spent approximately 30 hours a week practicing there. The IRS and the Tax Court denied the deduction, holding that “off premises practice” (at home, instead of at the Metropolitan Opera House) was not a requirement of the musicians’ jobs and that the musicians’ “principal place of business” was Lincoln Center.
The Second Circuit Court of Appeals in New York (one of nine Circuit Courts, which are just below the U.S. Supreme Court) reversed the Tax Court. The court first rejected, as clearly erroneous, the Tax Court’s conclusion that practice was not a “requirement or condition of employment.” The court then concluded that the musicians’ principal place of business was their home practice studios, finding that this was “the rare situation in which an employee’s principal place of business is not that of his employer.” Accordingly, the musicians were granted the deduction for home office expenses.
Because the issue did not go to the U.S. Supreme Court, the IRS took the position that this decision was only applicable in the Second Circuit (covering New York, Connecticut and Vermont). Based upon the decision, many orchestra contracts were subsequently negotiated with provisions stating that the employer does not provide practice space at the hall or elsewhere – and, in some cases, that the musicians are expected to practice at home.
In 1993 the U.S. Supreme Court decided a case involving an anesthesiologist, Dr. Soliman, who spent 30 to 35 hours per week with patients at three different hospitals. None of the hospitals provided him with an office, so he used a spare room at home for contacting patients and other doctors, maintaining billing records and patient logs, preparing for treatments and reading medical journals.
The Supreme Court denied him a deduction for his home office, holding that the statute “does not allow for a deduction whenever a home office may be characterized as legitimate.” Instead, they ruled, courts must determine whether the home office is the taxpayer’s “principal place of business.” In this regard, the court outlined two primary considerations: “the relative importance of the activities performed at each business location and the time spent at each place.” [Commissioner vs. Soliman, 506 U.S. 168 (1993)]
With respect to the relative importance of the activity at each location, the Court held that “the point where goods and services are delivered must be given great weight in determining where the most important functions are performed.” Since Dr. Soliman’s services were actually delivered at the hospitals, this definition worked against him. As for the “time spent at each place,” the doctor spent considerably more time in the hospitals than he did at home. Thus, he did not meet either criterion.
Although the Supreme Court in Soliman did not expressly overrule the Drucker case, the two tests enunciated therein seemed to deprive musicians of their Drucker arguments, at least the one involving where goods and services are delivered. And so the matter stood until April 17, 2001. On that date, the Ninth Circuit Court of Appeals in California decided a case entitled Popov vs. Commissioner of Internal Revenue, 246 F. 3rd 1190.
A musician who played regularly with the Los Angeles Chamber Orchestra and the Long Beach Symphony, as well as for various studios making recordings for motion pictures, was denied the home office deduction. In 1993 Katia Popov worked for 24 contractors and recorded in 38 different locations. The recording sessions required that she be able to read scores quickly, since she and the other musicians did not receive the sheet music in advance of the sessions. And, again, none of her employers provided her with practice space. Thus, Popov used her living room to practice and to make recordings which she used for practice and demos. The room was used exclusively for her practice and she spent four to five hours a day practicing there.
As usual, the IRS and the Tax Court rejected her deduction of 40 percent of her rent and 20 percent of her electric bills. She appealed to the Circuit Court.
In applying the “Soliman Tests,” the Ninth Circuit stated, with respect to the “relative importance” test:
We simply do not find the “delivery of services” framework to be helpful in analyzing this particular problem. Taken to extremes, the Service’s argument would seem to generate odd results in a variety of other areas as well. We doubt, for example, that an appellate advocate’s primary place of business is the podium from which he delivers his oral argument, or that a professor’s primary place of business is the classroom, rather than the office in which he prepares his lectures.
We therefore conclude that the “relative importance” test yields no definitive answer in this case, and we accordingly turn to the second prong of the Soliman inquiry.
With respect to the “amount of time” test, the Court wrote:
The Service argues that the evidence is unclear as to “how much time Mrs. Popov spent practicing at home as opposed to the time she spent performing outside of the home.” It is true that the evidence is not perfectly clear and that the Tax Court made no specific comparative findings. However, the Tax Court found that she practiced four to five hours a day in her apartment. If we read this finding in the light most generous to the Service and assume that she only practiced four hours a day 300 days a year, Popov would still have practiced 1200 hours in a year. She testified that she performed with two orchestras for a total of 120-140 hours. If she spent a similar amount of time recording, she would still be spending about five hours practicing for every hour of performance or recording. The only plausible reading of the evidence is that Popov spent substantially more time practicing than she did performing or recording.
Thus, the Court found, “This second factor tips the balance in the Popovs’ favor. They are accordingly entitled to a home office deduction for Katia Popov’s practice space, because it was exclusively used as her principal place of business.”
Finally, with respect to the viability of the Drucker case, the Court stated:
We are unpersuaded by the Service’s contention that Drucker is no longer good law. The Service has not directed us to any decision that has ever called Drucker into question. The Supreme Court cited Drucker twice in Soliman, but never suggested that it was overruling Drucker’s result. Soliman, 506 U.S. at 171, 172, 113 S.Ct. 701. Although the particular “focal point test” employed by the Second Circuit may no longer be valid, we are unwilling to conclude that the Supreme Court sub silentio overruled a long-standing precedent. “Uniformity of decision among the circuits is vitally important on issues concerning the administration of tax laws. Thus the tax decisions of other circuits should be followed unless they are demonstrably erroneous or there appear cogent reasons for rejecting them.”
Because of the apparent confusion on this particular point of law, it is quite likely that the Popov case will ultimately be decided by the U.S. Supreme Court.
Stay tuned. Meanwhile, if you meet the requirements of Popov, take the deduction. In sum, those requirements appear to be as follows:
- A room which is used exclusively for practice.
- Unavailability of practice space at your employer(s)’ facility.
- Significantly more time spent practicing at home (as opposed to any other location) than spent at a concert hall, recording studio, jazz club, etc.