Slide Show | February 2012

10 Fat-Chance Tax Deductions

By Peter Blank

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Over the years, taxpayers have concocted a lot of zany arguments to justify tax deductions. We’ve come up with what we think are the 10 most creative ones that the courts decided did not quite work.

As secret agent Maxwell Smart would say, “Missed it by that much!”

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10 Fat-Chance Tax Deductions

Slide Show

10 Fat-Chance Tax Deductions - Slide Show

Overdone Overdrafts

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A couple who owned two struggling dry-cleaning businesses couldn’t get a loan from their bank because they were judged to be a bad credit risk. But they worked out a deal to regularly overdraw their account and then satisfy the overdraft after the bank called them. This odd financing method caused them to incur more than $30,000 a year in overdraft charges, which they deducted as a business expense.

This didn’t wash with the Tax Court, which nixed the write-off, saying the charges were unreasonably high. Not surprisingly, the pair wound up filing for bankruptcy.

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Overdone Overdrafts

Slide Show

10 Fat-Chance Tax Deductions - Slide Show

Red Blood Cell Depletion Allowance

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A woman with a rare blood type made more than $7,000 in a year as a blood plasma donor.

She sought to offset the income by claiming a depletion deduction for the loss of both her blood’s mineral content and her blood’s ability to regenerate.

While depletion is a proper write-off for firms that remove natural deposits of minerals such as coal and iron ore from the ground, the Tax Court decided that individuals cannot claim depletion on their bodies.

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Red Blood Cell Depletion Allowance

Slide Show

10 Fat-Chance Tax Deductions - Slide Show

Prostitutes and Porn

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A tax lawyer spent more than $65,000 in a year on prostitutes and pornographic materials. He deducted the total as a medical expense, making a novel argument that cited the positive health effects of sex therapy.

However, the Tax Court red-lighted his write-off, saying that his conduct not only was illegal, but also wasn’t for the treatment of a medical condition.

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Prostitutes and Porn

Slide Show

10 Fat-Chance Tax Deductions - Slide Show

Burning Down the House

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After a job transfer, a worker relocated his family to a new state. But his wife didn’t like living there and returned home with the kids. When he visited over a holiday weekend, he discovered another man had been living there with his wife. He and his wife quarreled, and she left the house. While she was out, he put some of her clothes on the stove and set them on fire. The conflagration spread and burned down the house.

The husband claimed a casualty loss deduction, but the Tax Court said no, reasoning that allowing him to deduct a loss from a fire he set would violate public policy.

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Burning Down the House

Slide Show

10 Fat-Chance Tax Deductions - Slide Show

Hush Money

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A pro football player who was in the middle of negotiating a contract extension got into an altercation with a lady friend. She ended up contacting the cops and filing a criminal complaint against him. The team told him that if the matter became public, he would be cut or traded. He agreed to pay the woman $25,000 to keep things quiet, and he got a four-year contract extension.

But he didn’t get a tax deduction for the payment, because the Tax Court said the claim arose out of a personal relationship that had nothing to do with pro football.

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Hush Money

Slide Show

10 Fat-Chance Tax Deductions - Slide Show

Vegas Gambling Junket

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In an effort to drum up business from banks, a repo firm sponsored a bus trip to Las Vegas. Although employees talked informally with their collection contacts on the ride to Vegas, no formal business meetings were scheduled, and everyone spent most of the weekend gambling. The trip was a rousing success because the repo firm got a lot more business from the attendees.

The company was less successful in the Tax Court, which denied the deduction for the junket because the business discussions were an insubstantial part of the trip.

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Vegas Gambling Junket

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10 Fat-Chance Tax Deductions - Slide Show

Meals with Colleagues

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A partner in a law firm met every day with his colleagues at lunch to discuss the firm’s business, such as case assignments and settlements. But the IRS balked when he asked Uncle Sam to pick up part of the tab. The Tax Court came down on IRS’ side, saying that the cost of the meals was a non-deductible personal expense, even though business was discussed. The moral of the story is that while the partner can have his cake and eat it for dessert, he can’t get a subsidy from other taxpayers for his meals.

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Meals with Colleagues

Slide Show

10 Fat-Chance Tax Deductions - Slide Show

Designer Clothes

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The manager of an Yves Saint Laurent boutique was required to purchase and wear the designer’s clothing as a condition of her job to project the image of an exclusive lifestyle. She deducted the cost of the clothes as an employee business expense because she only wore the outfits at work. In her view, the clothes were too dressy for her simple, everyday lifestyle. Nevertheless, a court denied her deduction because the clothes were suitable for wear outside of work, even though they were not her taste.

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Designer Clothes

Slide Show

10 Fat-Chance Tax Deductions - Slide Show

Wrecking a Rental Car

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An airline employee needed to get to New Orleans but was stranded by heavy fog. He worked out a great deal with a rental car company where he paid nothing for a car that the company needed driven to New Orleans.

Unfortunately, he wrecked the auto in Mississippi and had to pay for the damages. He tried to deduct the payment as a casualty loss, but the Tax Court denied his write-off because he wasn’t the owner of the vehicle.

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Wrecking a Rental Car

Slide Show

10 Fat-Chance Tax Deductions - Slide Show

Shoddy Construction

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A couple paid a builder to construct their dream home. Not long after they moved in, they discovered a series of problems with the house, including the foundation, that made living there a nightmare.

They claimed that the builder defrauded them and deducted a large theft loss on their tax return.

But the Tax Court denied the deduction, saying that although they were victims of poor workmanship, they weren’t victims of fraud.

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Shoddy Construction

Slide Show

10 Fat-Chance Tax Deductions - Slide Show

More from Kiplinger

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SLIDE SHOW: 14 Extraordinary Tax Deductions (that Succeeded)

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