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All Contents © 2019The Kiplinger Washington Editors
By Peter Blank, Editor
| March 20, 2017
Over the years, taxpayers have concocted a lot of zany arguments to justify their tax breaks. We’ve come up with what we think are the 16 most creative ones that the courts decided did not quite work.
As secret agent Maxwell Smart would say, “Missed it by that much!”
A busy tax preparer ran her business from her home. During tax season, she felt so harassed from clients calling her at all hours of the day and night that she occasionally booked a room at a local hotel for some peace and quiet. On her own return, she deducted the cost of this rest and relaxation as a business expense. Unfortunately for her, the Tax Court ruled that the cost of her good night’s sleep was a nondeductible personal expense.
An Oregon couple filed for Chapter 13 bankruptcy protection but continued to get repeated letters from the IRS demanding payment and threatening enforcement actions. That's a no-no—one of the core tenets of the bankruptcy process is the "automatic stay," which requires all creditors to hold off once a petition is filed.
The couple sought $4,000 in emotional damages for the letters ("brief losses of appetite, stress, and mounting frustration' for the husband; "debilitating migraines for the wife") and a bankruptcy court agreed.
But a district court overturned that. The ruling judge evinced some skepticism of the merit of the couple's claims, but threw out their suit for a different reason: sovereign immunity. In short, unlike an individual or corporation, the federal government can't be held liable for emotional distress.
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.
A woman in Washington, D.C., ran her own staffing and consulting business. She hired her three children, ranging in age from 8 to 15, to help her with jobs such as shredding, stuffing envelopes, copying and tending the yard around her home office.
The mother, who was also a paid tax preparer, included the hours her kids worked on time sheets and issued them W-2 forms.
But instead of paying her children in cash, she bought them meals, including pizza, and paid for tutoring. She tried to deduct the kids’ “wages” as business expenses, but the Tax Court didn’t buy it. In its view, the services that the children performed were more for parental training and discipline than part of the typical activities of employees, so it denied her write-off in full.
A married couple operated separate proprietorships. The wife’s operation turned a small profit, but her husband’s business generated a sea of red ink. When figuring their self-employment tax bill, the couple claimed the bonds of matrimony allowed them to offset his loss against her income to wipe out any self-employment tax liability.
The IRS disagreed, saying that even though they were married, his losses could not be used to reduce the self-employment tax bill on her income. Playing the referee in this tax dispute, the Tax Court sided with the IRS because the husband had no hand in running her firm. “The fact that they discussed their respective businesses over meals does not establish that [the husband] played a role in operating the realty business,” the ruling noted.
After a police officer discovered his wife was having an affair with her doctor, he confronted the doctor and threatened a lawsuit. Eventually, the doctor agreed to pay $25,000 to settle the matter. The police officer claimed the $25,000 was a tax-free gift, but the Tax Court said that the payment is taxed as income because it was offered to settle the doctor’s misconduct.
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.
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.
A wife was sent to jail for killing her husband. Although she was named as the primary beneficiary of his 401(k) plan, state law barred her from receiving any of the funds because of her crime. So the account was paid to their son instead as the secondary beneficiary. He claimed that his mother should be taxed on the payout as the intended beneficiary. An Appeals Court gave him an A for effort but an F in taxation, ruling that he owes tax on the distribution.
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.
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.
Sales personnel for Ralph Lauren are expected to wear their employer’s clothing when they’re on the job. But while this may constitute a uniform of sorts, just like a welder’s flame-retardant coveralls, the IRS sees an important distinction: The designer’s duds are "suitable for general or personal wear.”
So the Tax Court stripped bare a New York-based salesman’s attempt to deduct nearly $5,000 of clothes as unreimbursed employee expenses. A New York bartender ran into similar trouble for attempting a five-figure deduction for the all-black clothing he was expected to wear on the job.
A couple’s tax returns were filed late and were riddled with questionable deductions, such as the cost of dining room furniture and a fish tank. That piqued the IRS’s attention. After an audit, the couple was slapped with a late-filing penalty and a big tax bill. They claimed that their late filing should be excused because their accountant had been sent to jail for killing her husband and the person who took over her office was incompetent. The Tax Court refused to cut them any slack.
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.
Homeowners who want to tear down their homes and rebuild sometimes ask firefighters to burn them down. This training exercise serves the public good. But to get a deduction, an Appeals Court says that the homeowner must show that the value of the donation exceeded the value of the demolition services provided. Since the house in the case before the court had to be destroyed anyway to make room for its successor, its value was negligible and didn’t exceed the value of the demolition services that the owners received, so the homeowner’s charitable deduction was denied.
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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