Just joining us? Part one discussed court decisions on whether expenses qualified as “ordinary and necessary” under IRS Code 162. More on such disputes in part two.
Weddings, funerals and bar mitzvahs. The IRS and the courts agree that weddings, funerals and other family events are more personal than business in nature.
For example, the Tax Court held that the IRS properly disallowed a business-expense deduction for a trip to a funeral. A husband flew to Europe to attend his wife’s rites, at which he met many business contacts, and he also visited others during the balance of his stay abroad. The court’s response: “We cannot believe that the funeral was incidental and business was the primary motive for the trip.”
The Tax Court took a similar tack in 1986 with Arnold H. Feldman, a Philadelphia rabbi who invited his entire congregation to a reception for his son’s bar mitzvah—the ceremony that celebrates the acquiring of religious responsibility when a Jewish boy reaches the age of 13.
About 700 congregants showed up, of whom 100 did double duty as friends and relatives. A bar mitzvah celebration, the rabbi urged the court, “may to the lawyer be a personal or social event, to the rabbi serving in a congregation it is an integral part of his professional activities.”
The court turned down the rabbi’s request for a Talmudic-type distinction. It determined that he “stands in no better a tax position than anyone else who invites a large number of people to a family celebration and has in mind the idea that the invitations might enhance either an existing business relationship or a hoped-for business relationship.”
While this decision doesn’t mean that the courts are unwilling to ever allow family celebrations to qualify as business expenses, its unsympathetic approach underscores just how hard it can be to justify deductions for gatherings that, by their very nature, are primarily personal, not business.
Professional blood donor gets to deduct some unusual travel costs. Few tax rules are as long standing and as stringently enforced by the IRS as the agency’s blanket prohibition of deductions for the costs of commuting between home and work. The IRS classifies these travel expenditures as nondeductible personal expenses.
But most deduction-restriction rules have their exceptions. For example, a 1974 decision by the Tax Court held that the IRS couldn’t use the commuting ban to assess additional taxes against a professional blood donor.
For the year in question, Margaret Green, whose blood type is a rare AB negative, earned most of her income by selling her blood to a laboratory. When filing time rolled around, she staunched the hemorrhaging to the IRS with hefty business-expense deductions for travel, medical insurance, special drugs and high-protein diet foods and a depletion write-off for the loss of her blood’s mineral content.
The tax collectors argued that the deductions should all be disallowed, as she didn’t carry on a business. For the most part, however, the Tax Court sided with Margaret. It was precisely for business reasons — that is, the sale of her plasma — that she maintained a special diet and regularly traveled to the lab.
For starters, the court approved Margaret’s outlays for high-protein foods and dietary supplements to maintain the quality of her plasma. Moreover, she prevailed on the issue of deductions for home-to-lab travel. Said the court: “Unique to this situation, the taxpayer was the container in which her product was transported to market. Had she been able to extract the plasma at home and transport it to the lab without being present, such shipping expenses would have been deductible as selling expenses.”
No business write-off, though, for the full cost of what she spent on medical insurance premiums. They’re personal in nature and deductible only under the usual rules for medical expenses. Her medical insurance isn’t comparable to insurance maintained by a business to protect against loss or damage to machinery.
Margaret also wasn’t entitled to a depletion deduction for the loss of her blood’s mineral content and the loss of her blood’s ability to regenerate. The stopper is that Congress enacted the tax code provisions on depletion to promote the exploration and development of our nation’s geological mineral resources. The court noted that the “bodies and skills of taxpayers are not among the `natural deposits’ contemplated by Congress in those depletion provisions.”
What’s next. More in part three on how the courts decide what’s ordinary and necessary.
