Everyone wants to cut taxes, but sometimes people try too hard. Over the years, taxpayers have presented many foolish arguments to justify their tax incentives. We had put together some of the most creative tax breaks that have been presented before the court but got rejected.
A new idea does not fly: A successful author who wanted to pay less tax on her initiative said that much of the money received from contracts with publishers and journalists was spent on using her name and likeness. She then reported this part as investment income in Schedule E of the 1040s (and not as a profit from self-employment, which is usually stated in Schedule C). The tax court did not accept her argument, claiming that her brand was part of her work as an author. The contracts she signed with the publisher did not individually pay for her name and likeness, and it is common for authors to build their brands and promote their work, and that she owed self-employment taxes on all her earnings, much to her dismay.
A little peace and tranquillity: A busy tax preparer ran her business from home. During tax season, she was so annoyed by customers that they called around the clock, and cause of that would sometimes book a room at a local hotel for peace. Upon her return, she deducted relaxation expenses as business expenses. Unfortunately, the tax court decided that the cost of a good night's sleep was a nondeductible personal expense.
Investigate the mysterious death of his father: A chartered accountant paid millions of dollars to a P.I and other experts to help investigate if his father, who died when the taxpayer was a child, committed suicide or was murdered. The payments were deducted from schedule C as business expenses. He thought that if he gathered enough evidence, the story could turn into a book or even a movie. The tax court classified his business as a hobby and rejected the break.
My little princess: The daughter of a couple started participating in beauty contests at the age of 9. Their little princess won between $ 1,000 and $ 2,000 in prizes each year, and the money was deposited into her college savings account. The parents declared income on their return and also significantly took off large write off from travel, clothing, and other expenses. Because the cash prize was compensation for the child's services in the contest, they are included in her income, and she alone can deduct the costs, even if the parents bore the costs. The tax court refused the parents' deductions.
Pizza for the Kids: A woman from Washington, DC, ran her counseling business. She hired her three kids, aged 8 to 15, to help with tasks such as tearing up, filling envelopes, copying, and cleaning the yard around the home office. The mother, who was also a tax preparer, included the hours worked by her children on the timesheets and offered them W-2 forms.
But rather than pay her kids, she bought meals, including pizza, and paid for lessons. She tried to deduct the children's "wages" as professional expenses, but the tax court did not buy it. For her, the services offered by the children were more for the education and discipline of the parents than part of the typical activities of the employees, so that total cancellation was refused.
Tax on love, marriage, and self-employment: A couple ran separate businesses. His wife's operation generated a small profit, but her husband's business made a lot of losses. In calculating their tax account, the couple argued that the marriage bonds allowed them to offset the losses with the gains to eliminate any tax liability by themselves.
The IRS disagreed, stating that even if they were married, their losses could not be used to reduce income tax. The tax court agreed with the Internal Revenue Service because her husband had no part in the conduct of her business. The fact that she talks about the respective activities during meals does not show that her husband played a role in the management of the real estate business the court noted.
Payment for an adventure: After a police officer learned that his wife was having an affair with his doctor, he confronted him and threatened her in court. Finally, the doctor agreed to pay $ 25,000 as a settlement. The officer claimed that $ 25,000 was a tax-exempt gift, but the tax court said the payment was taxed as income because he had been offered to deal with the doctor's misconduct.
Prostitutes and pornography: A lawyer spent more than $ 65,000 a year on prostitution and pornography. He deducted the total medical costs, presenting a new argument that mentions the positive health effects of sex therapy. However, the tax court renewed its cancellation, declaring that his behavior was not only illegal but also was not for the treatment of a medical condition.
Billing Mommy: A woman was sent to prison for killing her husband. Although she was named the primary beneficiary of his 401 (k) plan, state law prohibited her from receiving funds because of her crime. The account was paid to their child as a secondary beneficiary. He argued that his mother should pay taxes on the payment as the intended beneficiary. The tax break was rejected by the court.
Elliot Kravitz, ATP