¶1It is easy to take a narrow view of the arrangement at issue in this case and conclude that it is nothing more than a lease described in section 280A(c)(3). However, in my judgment, it is our responsibility to take a broader view of the arrangement, to examine all the surrounding circumstances, and to recognize that the effect of the arrangement is to subvert the limitations of section 280A(c)(l) on the use of a personal residence for business purposes. Hence, I believe the deductions should be disallowed.
¶2It is well settled that, generally, the tax consequences of a transaction are to be based upon its substance, not its form. Gregory v. Helvering, 293 U.S. 465 (1935); Commissioner v. Court Holding Co., 324 U.S. 331, 334 (1945); Helvering v. Clifford, 309 U.S. 331 (1940). It is equally well settled that to determine the substance of a transaction, the various related steps must be judged together, not separately. Gregory v. Helvering, supra; Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179, 184-185 (1942); Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613 (1938). Form is too ephemeral; it is too subject to mistake or manipulation. Schmitz v. Commissioner, 51 T.C. 306 (1968), affd. sub nom. Throndson v. Commissioner, 457 F.2d 1022 (9th Cir. 1972); Hook v. Commissioner, 58 T.C. 267 (1972). Tax consequences, in fairness to both the taxpayer and the Commissioner, should be based on harder stuff.
¶3In the venerable case of Gregory v. Helvering, supra, the taxpayer owned the stock of the old corporation. A new corporation was formed. The old corporation transferred some of its property to the new corporation, and the stock of the new corporation was issued to the taxpayer. Thereafter, the taxpayer liquidated the new corporation and received a distribution of the property. The taxpayer maintained that there was a tax-free corporate reorganization and that she received the property as a liquidating distribution. In his famous opinion (69 F.2d 809 (2d Cir. 1934)), Judge Learned Hand recognized that if the transactions were separated, they came within the literal terms of the statute. However, he observed:
It is quite true … that as the articulation of a statute increases, the room for interpretation must contract; but the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create. … [69 F.2d at 810-811.]
¶4Both the Supreme Court and Judge Hand refused to consider the transactions to be separate ones; they viewed them together and concluded that the statutory provisions were not intended to permit the conversion of a dividend into a liquidating distribution.
¶5In Helvering v. Clifford, 309 U.S. 331 (1940), the Supreme Court again refused to recognize, for tax purposes, the niceties of legal transfers of property. The Court said:
Technical considerations, niceties of the law of trusts or conveyances, or the legal paraphernalia which inventive genius may construct as a refuge from surtaxes should not obscure the basic issue; … [309 U.S. at 334.]
¶6The Court found that, despite a transfer in trust, the grantor continued, in substance, to be the owner of the property and taxable on its income. In a like manner, our hands are not tied by the form of the arrangement at issue; in applying the statutory provisions, we must consider all the provisions of section 280A and look to the substance of the arrangement.
¶7Section 280A was enacted in response to the perceived "great need for definitive rules … governing the deductibility of expenses attributable to the maintenance of an office in the taxpayer’s personal residence.” S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49,185; H. Rept. 94-658 (1975), 1976-3 C.B. (Vol. 2) 695, 852. Congress observed;
In many cases the application of the appropriate and helpful test would appear to result in treating personal living, and family expenses which are directly attributable to the home (and therefore not deductible) as ordinary and necessary business expenses, even though those expenses did not result in additional or incremental costs incurred as a result of the business use of the home. … [H. Rept. 94-658, supra, 1976-3 C.B. at 852.]
¶8See also S. Rept. 94-938, supra, 1976-3 C.B. (Vol. 3) at 185. To carry out the legislative purpose, section 280A denies a deduction, in the case of an individual, for all the expenses of a dwelling unit used as a residence, but other provisions of section 280A contain exceptions to that general rule. Section 280A(c)(1) deals with the use of a portion of the residence for business purposes and allows deductions when such portion is exclusively and regularly used:
(A) [as] the principal place of business for any trade or business of the taxpayer,
(B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or
(C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer’s trade or business.
¶9Another exception is set forth in section 280A(c)(3) for "the rental of the dwelling unit or portion thereof.” The clear legislative purpose of these provisions is to deny the taxpayer a deduction for the expenses of maintaining his residence unless those expenses are attributable to a use described in one of the specified exceptions.
¶10Here, we have a purported lease of a portion of the residence, and if that arrangement is considered a lease, it comes within the terms of section 280A(c)(3). However, this was not a lease to a disinterested third person. It was a lease to the employer of the taxpayer, and as a result of the lease, the taxpayer used a portion of his residence to carry on his business activities. Thus, if we take into consideration the consequences of the lease, we find that we have a taxpayer using a portion of his residence for business purposes and claiming a deduction for the expenses of such use.
¶11Generally, a taxpayer is not to be allowed a deduction for depreciation on his residence or for the expenses of maintaining that residence, unless the business use meets the specific conditions of section 280A(c)(1). Yet, by looking only at section 280A(c)(3), the majority of the Court allows this petitioner deductions for such purposes, without regard to whether his business use meets the conditions of section 280A(c)(1). The allowance of the deductions for depreciation and the other expenses of maintaining the residence attributable to the business use directly contravenes the purpose of section 280A(c)(1). It is no answer to say that the deductions are allowed to offset the rental income; if the deductions are considered from that point of view, then the employer of the petitioner is paying for the depreciation and maintenance of the petitioner’s residence, without the petitioner being taxed on such benefits.
¶12We are confronted with a situation in which the transaction at issue may be said to come within the terms of one provision of the statute, section 280A(c)(3), but in which the transaction clearly should be subject to another provision of the statute, section 280A(c)(1). The majority considers only the lease and the applicability of section 280A(c)(3). It is as if the Gregory Court had looked only at the liquidating distribution and the statutory provision pertaining to such distributions. However, as in Gregory, we should take into consideration all aspects of the transaction, not merely that it is a lease; we should also recognize that it is an arrangement under which a portion of the petitioner’s residence is used to carry on his business. We should also, as in Gregory, take into consideration the various applicable statutory provisions and construe them as a whole. When we take into consideration the entire statutory scheme for the treatment of the expenses of maintaining a residence, we should hold that a lease of a portion of the residence to the employer and the resulting use of such portion by the petitioner for business purposes must be examined in the light of the requirements of section 280A(c)(1). When those requirements are not satisfied, the expenses of the residence should not be deductible.