For those of you who are just joining the discussion, go to the first four parts for an analysis of IRS administrative rulings and court cases on whether write-offs for business expenditures satisfy the “ordinary and necessary” requirements imposed by IRS Code 162. More on such requirements in part five.
Publish or perish. The courts repeatedly make subtle distinctions. A case in point is a 1979 Tax Court decision. It disallowed payments made by Fannie Hawkins to get her book published by Vantage Press. Vantage is a “vanity” publisher, meaning it produces books at the author’s expense—the reverse of the usual publisher-pays-author arrangement.
No problem, though, for the court to approve “publish or perish” outlays. It sided with a research scientist who paid for publication of a paper on his research; in his field of work, published papers were considered a prerequisite to job advancement.
Hire your girlfriend and take a deduction. Is it ever possible to hire your live-in companion and take a business deduction for the wages you pay him or her? Sometimes. But expect IRS auditors to scuttle your deduction, though the Tax Court might be a tad more sympathetic, as Douglas Bruce discovered.
For the year in issue, Douglas, a Los Angeles district attorney, paid $9,000 to Elissa Elliott, his girlfriend, to cover her living expenses and those of her son and dog. In return, she agreed to run his household and assume major responsibility for the management of his extensive rental properties, chores that included finding furniture and overseeing repairs.
Douglas deducted the entire $9,000 as compensation to Elissa for property management. The IRS disallowed all of it, asserting that her services were personal and that he was unable to establish any measurable business expense. But in 1983, an understanding court decided that Douglas qualified for a reduced write-off.
It was indisputable, noted the court, that he had to have a property manager; clearly, she acted as one. Still, “it would be naive at best to conclude that every penny of the support” that he furnished was “solely for purposes related to his investment properties.” By its reckoning, “the significant number of properties which were actually rented or were held out for rental during the period” justified a deduction of $2,500 for the compensation Douglas paid to Elissa for managing his real estate.
Criminal prosecutions. A drug-trafficking probe of the Phoenix Fire Department resulted in the conviction on possession charges of firefighter Frank Zielezinski of Scottsdale, Ariz. Personal conduct, not firefighting duties, caused him to shell out for defense fees, which is why the court denied his deduction.
The Tax Court refused to go along with a New Yorker whose justification for deducting the cost of defending his wife on shoplifting charges was that she would’ve lost her job if she were jailed. Nor would the court allow a man to write off what he spent to successfully defend himself against a charge of murdering his sister-in-law. It was indifferent to the argument that the man’s business “would have been destroyed” had he been found guilty and sent to prison.
Business-expense deductions for health club memberships are purely personal expenses. It makes no difference that your employer requires you to stay in excellent physical condition, according to an IRS ruling that denied such deductions for police officers (Revenue Ruling 78-128).
Daily restaurant meals and birthday bashes are also not deductible. For instance, talking about business during lunch fails to transform a normal nosh into an IRS-blessed deduction––a legal lesson learned by, of all persons, John Moss, a partner in a law firm that regularly argued cases in the courts.
John contended that his share of the partnership’s daily lunches ought to be allowable as the diners discussed such matters as settlements and court hearings. His argument fizzled. The court concluded that the convenience and benefit to the firm made the meals no more deductible than riding to work together each morning to discuss partnership affairs would make commuting costs deductible.