Reporting taxes is a process that feels like it's littered with rules and pitfalls. Every tax lawyer has stories about unusual deductions that people tried to claim, and there are always some surprising ones that actually held up in court. Let's take a look at three real situations that required the help of a tax attorney to sort out.
Is It Really a Business Expense?
In 1984, a couple, John and Joana French, wrote off expenses for the maintenance and use of a private plane. The pretext for doing so was that they used the plane to check after rental condos in the eastern mountains of California because they lived on the western coast of the state. An IRS review concluded that because the couple and their family partook in enjoyable activities, such as skiing, while in the east, the trips were actually vacations and not deductible.
The tax court heard the case in 1990 and ruled in favor of the couple. In the process, the judge applied a reasonableness test. This is a test based on the idea that it would reasonable for the couple to expense the aircraft's maintenance because of the difficulty of the travel and the reasonableness of personally managing their properties.
The Depreciating Value of Breast Implants
You might not think cosmetic surgery is deductible, but that depends on what you do to make your living. In the case of Cynthia Hess, an exotic dancer, the IRS took exception to her claiming depreciation on the value of several breast implant procedures she had previously paid for. The Tax Court took a different view, ruling in her favor because the implants were stage props that helped her increase her income.
When Injury Law Conflicts with Tax Law
One of the more perplexing problems tax courts face is that the way the IRS treats physical injuries and emotional traumas contradicts the way most states' civil courts treat them. If you receive a judgment or a settlement in a personal injury case, there's a good chance you can treat any compensation as tax-free as long as the injury is physical. Compensation for emotional traumas, astonishingly enough, is not tax-free.
The IRS is also very narrowly focused on the original injury claim. For example, a woman who received $100,000 for emotional distress caused by an employment termination was told by the tax court that she couldn't claim compensation for physical symptoms as tax-free income. For more information, contact a company like Kitch Law Firm today.