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By Peter Barton, MBA, CPA, JD, Professor of Accounting and Clayton Sager, PhD, Associate Professor of Accounting, University of Wisconsin-Whitewater

In Mulne v. Commissioner, the Tax Court ruled that an employee with a demanding job could deduct the cost of a home computer used to prepare required reports which she was unable to complete at work during business hours. Her employer did not allow her to use her office at work after business hours. The Tax Court applied the strict "condition of employment" test in this ruling. Covering computers and certain other property, Mulne affects millions of taxpayers.

IRC Sec. 280F contains special requirements for depreciating or expensing "listed property," which includes computers, passenger automobiles, cellular phones, and any property used for entertainment or recreation. [Computers used exclusively at a business, including a home office deductible under the stringent requirements of Sec. 280A(c)(1), are not listed property.] To be depreciated, listed property must be used in a taxpayer's trade or business. Accelerated depreciation or expensing is allowed only if the property's business use exceeds 50% for each year of its life; and, for employees, it must be used "for the convenience of the employer and required as a condition of employment."

Temp. Reg. Sec. 1.280F-6T(a)(2)(ii) indicates that the "condition of employment" test is satisfied if the property's use is "required in order for the employee to perform the duties of his or her employment properly." The employer's explicitly requiring the employee to use the property is neither necessary nor sufficient in this regard. Instead, all of the facts and circumstances are relevant in determining if the property is necessary for the employee to do his or her job properly. Temp. Reg. Sec. 1.280F-6T(a)(4)(Ex. 5) disallows a home computer deduction where the employee, an engineer, "occasionally takes work home at night rather than working late in the office."

In addition to the Sec. 280F requirements, Sec. 274(d) prohibits any deduction for listed property unless the taxpayer substantiates "by adequate records or by sufficient evidence corroborating the taxpayer's own statement" the property's cost, the time and place of its use, and its business purpose. Temp. Reg. Sec. 1.274-5T elaborates on these requirements.

In Mulne, Sherri Mulne was a sales manager for Pacific Bell who was required to train and supervise sales representatives, develop sales strategies, handle customers, review paperwork, and prepare reports. However, she had insufficient time to prepare the reports during business hours, and she did not have access to her office at Pacific Bell after business hours. A Pacific Bell supervisor testified that home computers permitted sales managers to work more efficiently and effectively. During 1991, Mulne purchased an old IBM computer and printer for $3,689 for her home office, which she testified she used exclusively for business purpose. Using a modem, she accessed information from Pacific Bell and completed various required reports at home. She expensed the computer, and the IRS disallowed the deduction.

Finding that Mulne's large volume of work required her to use a computer in her home, the Tax Court ruled that Mulne's home computer was for the convenience of her employer. Also, the court ruled that the convenience of the employer and the condition of employment tests were essentially the same. Regarding the Sec. 274(d) substantiation requirements, the court simply stated that Mulne was a credible witness. Therefore, she could deduct the computer's cost.

Mulne establishes that employees can deduct home (or laptop) computers that are listed property if a computer is required to do their job properly and they do not have access to their office computer at work after business hours. Of course, the IRS and the Tax Court have leeway in interpreting "properly." Also, it is not clear if the court would have denied the deduction if she had greater access to her office computer at Pacific Bell. Given these uncertainties, taxpayers should maintain a log of the business use of their home computer, emphasizing the importance of this use to their job as well as its frequency. Also, taxpayers should use their home computer during times when they do not have access to their office computer. *

Source: Mulne v. Commissioner, T.C. Memo 1996-320 (July 15, 1996).

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