2 Certain other charges by Metro Softwater have been deducted to the extent of 25 percent under the category of Utilities.

3 For the taxable year ending December 31, 1969. Cyprus Shores Community Association billed its residents a security charge at the rate of $75 per month.

It is difficult to ascertain exactly what these charges were for because they are treated as miscellaneous.

It appears that Mission Pool Service charges $40 per month for its monthly services and increases this basic charge for any additional labor and equipment that might be necessary.

Mr. Garcia earned $514 per month from April through September, for a total of $3,084. An additional $7.85 was paid to him as reimbursement for gas for the truck. Prior to April. Mr. Garcia was on the payroll of the Secret Service. Beginning in October, 1970, Mr. Garcia's earnings were deducted under the category of Household Help.

It appears as though White's Landscape Service had a monthly contract of $335.91 to which was added any landscape purchases and additional labor required for installation and maintenance. The initial charge by White's Landscape Service as reflected in the accounting records was in May, 1970.

In addition to the monthly security charge of $75, the President was billed for $50 for the repair of a hole in the street.

It appears as though Mesa del Mar Nurseries began a monthly landscape service in October, 1971, at the rate of $292 per month plus any additional charges for extra labor and materials.

19 It appears as though the Cyprus Shores Community Association increased its monthly security charge to $150.

11 This amount includes charges for a hot water heater, painting, plumbing, and light bulbs, three drain grills, and a variety of repairs.

1 This charge includes repairs to a heater and the furnace as well as as service calls to the residents.

13 No explanation for this charge could be found.

14 This charge was for cleaning Mrs. Nixon's bathroom rug.

15 Without additional information, it is not possible to ascertain which of the household maintenance charges for this year were reduced by this journal entry. This entry was also posted to the Trustee account. It is possible to speculate that this original charge was cancelled by the particular vendor or that reimbursement was received for this particular expenditure.

is Included in this charge are two months of service for 1971, and three months of service for 1972.

17 The monthly service charge of $292 was increased to $600 per month beginning in September, all of which is for landscape service.

18 This is a monthly security charge at the rate of $150 per month.

19 Included in this amount is the cost of repairing an ice machine ($432.24), other repairs, and a motor for a refrigerator.

20 The cash disbursements journal does not indicate the reason for this charge.

21 In addition to a variety of repairs, this amount includes a charge for $615, the explanation of which was not given in the journals.

22 It appears as though this company has a monthly contract for $7.50.

23 Although shown as one disbursement, it was not possible to ascertain to whom the check was drawn or for what purpose.

24 The only explanation for this reduction was that it was a reimbursement from the B & C Investment Company.

As Table 3 shows, it would appear that virtually all costs paid by the President which relate to maintaining the San Clemente house and grounds were prorated for inclusion in this deduction. The staff's examination of the President's accounts produced few San Clemente maintenance expenditures made by the President which were excluded from the group on which a 25-percent deduction was taken.

Household help expenses.-During the latter part of 1969, the President employed a maid for approximately 3 months. She was paid $550 for her work in those months. Twenty-five percent of that amount, or $137.50, was deducted on the President's 1969 tax return. Maid services were terminated in January 1970, and she was paid $50. In addition, in that year the President hired a gardener, who previously had been on the payroll of the Secret Service (see part 7 of this report dealing with Government expenditures on the President's property). The gardener began work for the President in April 1970

and was treated as an independent contractor through September 1970. During this period of time, payments to him were deducted as household maintenance expense. Beginning in October 1970, the gardener's status was changed from an independent contractor to an employee of the President; he was paid $1,542 for the remainder of that year in the status of an employee. On the President's 1970 tax return was a deduction for 25 percent of the payments to the gardener and the maid for that year.

During 1971 and 1972, the President continued to employ a gardener. Twenty-five percent of the gardener's salary was deducted in those years. The amounts deducted were $1,592 in 1971 and $1,642 in 1972. Federal payroll taxes were paid with respect to wages paid to the gardener beginning in October 1970. These amounts were deducted to the extent of 25 percent. In 1971, $130.85 was deducted and in 1972, $92.42 was deducted.5

Staff conclusion

The staff believes that business deductions should not be allowed for any expenses relating to the San Clemente residence. Accordingly, the deductions claimed with respect to San Clemente should be disallowed in the following amounts: $4,699.62 for 1969; $7,808.49 for 1970; $10,237.40 for 1971; and $9,422.35 for 1972.

The staff believes that no deduction is allowable either under the Internal Revenue Service "required as a condition of employment" standard for allowing such deductions or under the "appropriate and helpful" standard established in various court cases.

The position of the Internal Revenue Service as set forth in its revenue ruling on deducting home office expenses (Rev. Rul. 62-180) under section 162 requires that the work done at home be required by the employer as a condition of employment and that the employer provide no adequate substitute facility or compensation for use of the taxpayer's facility. It is clear that the maintenance of an office in the San Clemente residence is not a condition of employment imposed by an employer. In the case of the President of the United States, it appears that his employer requires him to be available for work at virtually all times. However, in this case, the existence of the administrative complex next door to the President's residence indicates that the Government has adequately provided facilities for the President to use at all times when he must work. Under the Internal Revenue Service position, the deductions for San Clemente expenses would clearly be disallowed.

With respect to the wages of $550 paid to the maid during the last calendar quarter of 1969 and the payments made to the gardener from April 1970 through September 1970, the President did not withhold any Federal income taxes or social security taxes nor did the President pay social security taxes on wages as the employer. Payments which were made to the maid in 1969, as well as the payments made to the gardener between April and September 1970 should also have been reported for payroll tax purposes and social security tax paid thereon. Section 3111 of the Code imposes an excise tax, commonly known as the social security tax, on every employer at specified percentages of the wages paid by him. Generally, under section 3121(a) of the Code, the term "wages" includes the remuneration paid to a domestic during any calendar quarter if the remuneration for such quarter is $50 or more.

The staff is of the opinion that the President should have withheld Federal income taxes from the domestic whom he employed, if she was subject to withholding, and should have withheld social security taxes from her. Additionally, the staff believes the President should have paid the employer's share of the social security taxes for her. The staff is also of the opinion that the gardener was not an independent contractor during the months of April through September 1970, and the President should have withheld Federal income taxes from him, if this gardener was subject to withholding, and should have withheld social security taxes from him. The President should also have paid the employer's share of social security taxes for this gardener.

The more liberal court decisions state that an employee can deduct expenses for use of his home for business purposes when use of a home office is "appropriate and helpful" to the employee's job. However, even in the Bodzin case, the court stated that a finding that the home office was simply for the taxpayer's personal convenience would bar the home office deduction if the primary reason for maintaining the office was the personal convenience of the employee. Indeed, in the absence of such a position, the "helpful and appropriate" standard would virtually render meaningless the statutory requirement that business expenses must be "necessary." In view of the proximity of the office complex furnished by the Government to the President's residence, the staff believes that the home office was maintained primarily for the personal convenience of the President. Thus, the staff believes that use of the President's home as an additional office is not "appropriate and helpful" under the court's standards, but merely duplicates the facilities provided by the Government and, therefore, is maintained by him primarily for his personal convenience. Accordingly, even assuming that the more liberal standard is appropriate in this case, the staff believes the deductions are not allowable under section 162 of the Code.

Furthermore, there is no evidence that the San Clemente residence would qualify as an entertainment facility used in a trade or business even if the expenses attributable thereto were otherwise deductible under section 162. The substantiation requirements of section 274(d) have not been met for this purpose.

Because the San Clemente property is not held for the production of income, there is no basis whatever for allowing a deduction with respect to these expenses under section 212 of the Code.

The expenses attributable to the San Clemente property are most appropriately classified as personal, living, and family expenses with respect to which a deduction is denied under section 262 of the Code.

Facts

B. EXPENSES RELATING TO KEY BISCAYNE PROPERTIES

In late 1968, the President purchased two adjacent residences at Key Biscayne, Florida. These residences, located at 500 Bay Lane and 516 Bay Lane, are part of the Presidential compound.

According to statements of the President's representatives, the residence at 516 Bay Lane is used primarily for personal and family purposes.

The President's representatives stated that the residence at 500 Bay Lane is used primarily for business purposes.

In an interview with the staff, Mr. Rebozo, who lives next door to the 500 Bay Lane residence, stated that the property was purchased for business purposes and that the living room and the office are used for staff meetings and for the President's work. However, Mr. Rebozo also noted that occasionally overflow guests of the President's family will stay in the two bedrooms at the 500 Bay Lane residence. Mr. Rebozo also stated that the President increasingly in recent years works at the 516 Bay Lane personal residence rather than at the 500 Bay Lane residence.

Other indications of the use of the property can be obtained from the furniture which the President purchased for the 500 Bay Lane property. The furniture purchase invoices indicate that one desk was

purchased, but that the rest of the expenditures were for living room and bedroom furniture.

The Government does not provide Mr. Nixon with an office at Key Biscayne. Since as President of the United States he is required to be available for work virtually at all times, the President needs some facility available for his own work and for work with his staff. The Government could have provided him with an office; in fact, the possibility of establishing an office for the President in a GSA facility under construction within the general area (to which the President could go by helicopter) was discussed in early 1969. However, the President preferred to have his own office at the residence and, according to Mr. Rebozo for that reason he purchased the second house. The staff understands that the President's decision saved the Government substantial costs which would have been incurred for preparing the office and transporting him and his staff back and forth.

On the President's returns for 1969-1972, 100 percent of the operating costs incurred in connection with the residence at 500 Bay Lane were deducted, and 100 percent of the depreciation expense on the residence at 500 Bay Lane was also deducted.

These deductions were taken, according to Mr. Blech, because he was told by Mr. DeMarco that the residence at 500 Bay Lane was used entirely for business purposes. Table 4 below lists the total deductions taken for use of the 500 Bay Lane property in all four taxable years.

TABLE 4-KEY BISCAYNE EXPENSES CLAIMED IN CONNECTION WITH THE USE OF RESIDENCES FOR OFFICIAL GOVERNMENT FUNCTIONS

Depreciation expense.-Total costs of the land and building at 500 Bay Lane was $125,526.55. For depreciation purposes $71,161 was allocated to land costs and $54,355.55 was allocated to building costs. This allocation was based on the 1969 land value and improvements as determined by the Metropolitan Dade County Tax Assessment Department. The cost allocated to the building was depreciated using the 150-percent declining balance method at an estimated useful life of 30 years.

Also, claimed on the tax returns for 1969 through 1972 was depreciation on improvements made to the 500 Bay Lane property. In 1969 improvements made to the property amounted to $34,734.01. In 1970 additional improvements in an amount of $3,208.23 were made. These improvements were depreciated using a 150-percent declining balance method and a useful life of 30 years. It should be noted that included among the improvements listed in the return are expenditures for furniture and furnishings in the amount of $13,208.23. Thus, the furniture and furnishings were also depreciated over a 30-year estimated useful life, rather than the shorter estimated life over which

furniture is normally depreciated (10 years). The depreciation taken for each year on these improvements and on the residence itself is shown below in Table 5.

TABLE 5.-DEPRECIATION CLAIMED IN CONNECTION WITH THE USE OF THE 500 BAY LANE RESIDENCE FOR OFFICIAL GOVERNMENT FUNCTIONS

Utilities. One hundred percent of all utility expenses incurred at 500 Bay Lane were deducted. These amounts are shown above in Table 4.

Insurance expense.-Table 4 indicates that a deduction was taken for insurance expenses in each of the 4 years under consideration. It is not clear whether these expenses are for a single prepaid policy attributable only to 500 Bay Lane or whether the amount deducted represents an allocation of a total insurance premium covering both residences. In any case, Mr. Blech stated to the Committee staff that the deduction represents 100 percent of costs of insuring the 500 Bay Lane property.

Staff conclusions

The staff believes that no deduction should be allowed as a trade or business expense under section 162 with respect to the expenses attributable to the Key Biscayne property. However, the staff believes that the expenses attributable to the real property located at 500 Bay Lane (but not the personalty located therein) should be allowable as ordinary and necessary expenses incurred in connection with property held for the production of income under section 212 of the Code. Accordingly, the staff believes that the following amounts are deductible:

With respect to section 162, it is clear that the maintenance of the office at Key Biscayne is not a condition of employment imposed by the United States Government, the President's employer. The expenses would therefore not be considered to be ordinary and necessary business expenses incurred by an employee under Revenue Ruling 62-180, which sets forth the "condition of employment" test followed by the Internal Revenue Service.

It is arguable that, under the Bodzin rule, the maintenance of the office in Key Biscayne is "helpful and appropriate" in the performance of the official duties of the President and that the office is not main