Sunday, April 8, 2012
Crazy Tax Deductions That Didn't Work—Part 1 of 2
It's that time of year again...Tax Time. Each year tax payers have tried to take the craziest deductions and have even pursued the matter in tax court when the IRS denied the deductions. Here are ten of the zanier deduction attempts.
1) Overdone Overdrafts:
A couple trying to keep their dry-cleaning businesses from going under had been denied business loans by their bank who had judged them to be a bad credit risk. They came up with a plan to ease their cash flow problems. They regularly overdrew their bank account and would pay the overdraft when the bank called. This ended up costing them more than $30,000 a year in overdraft charges which they deducted from their taxes as a business expense. The Tax Court denied the write-off, stating that the charges were unreasonably high.
2) Red Blood Cell Depletion Allowance:
Because of her rare blood type, a woman made more than $7,000 in one year as a blood plasma donor. She tried to offset the additional income through a tax deduction, claiming a depletion for the loss of both her blood's mineral content and her blood's ability to regenerate. Depletion is a proper write-off for firms that remove deposits of minerals such as coal and iron ore from the ground. The Tax Court ruled that individuals cannot claim depletion on their bodies.
3) Prostitutes And Porn:
A tax lawyer spent more than $65,000 a year on prostitutes and pornographic materials which he deducted as a medical expense. He stated the positive health effects of sex therapy. The Tax Court denied the write-off saying his conduct was illegal and also wasn't the treatment for a medical condition.
4) Burning Down The House:
A man relocated his family to a new state after a job transfer. His wife didn't like the new location and returned home with the kids. He visited over a holiday weekend and discovered another man had been living with her. They argued and she left the house at which time he put some of her clothes on the stove and set them on fire. It got out of control and burned the house down. He claimed a casualty loss deduction and the Tax Court denied it saying they could not allow him to deduct a loss from a fire he set.
5) Hush Money:
A pro football player got into an altercation with a lady friend at the time that he was in the process of negotiating a contract extension. She filed a criminal complaint against him. The team owner said if the matter became public, they would cut or trade him. He agreed to pay her $25,000 to keep things quiet and he got his four-year contract extension. When he tried to take the payout as a tax deduction, the Tax Court said the payment was a result of a personal relationship rather than a business expense.
6) Designer Clothes:
The manager of a designer label boutique was required to purchase and wear the designer's clothing as a condition of her job to project the image of an exclusive life style. A court denied her deduction because the clothes could be worn outside work regardless of the fact that they were not her personal taste of clothing.
7) Las Vegas Gambling Junket:
A repo company sponsored a bus trip to Las Vegas in an effort to drum up business from banks. The people talked informally about the collection business, but everyone spent most of the weekend gambling and no formal meetings were scheduled. The trip was very successful and the repo company got a lot more business from the attendees. However, the Tax Court denied them the deduction of the cost of the junket because the business discussions were only a small part of the trip.
8) Meals With Colleagues:
A partner in a law firm met every day with his colleagues at lunch to discuss the firm's business. Unfortunately, the IRS denied the deduction for the meals as being a business expense. The law firm took it to Tax Court where the court agreed with the IRS that the meals were a non-deductible personal expense.
9) Wrecking A Rental Car:
Heavy fog had an airline employee stranded who needed to get to New Orleans. He worked out a deal with a rental car company to take one of their cars that they needed driven to New Orleans. The company would have the car transported without having to pay a driver and he would get to New Orleans with no charge for the rental car. Unfortunately, he wrecked the car in Mississippi and had to pay for damages. When he tried to deduct the payment as a casualty loss, the Tax Court denied the deduction because he wasn't the owner of the car.
10) Shoddy Construction:
A couple paid a builder to construct their home. Shortly after they moved in, they found a series of problems with the house that made living there impossible. They deducted a large theft loss on their taxes, claiming the builder defrauded them. The Tax Court denied it stating they were the victims of poor workmanship rather than fraud.
Next week in Part 2, I'll be sharing some more strange deductions that didn't work along with some equally weird deductions that the IRS did accept.