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Archive for February, 2011

When you’re a news anchor, you have to ooze professionalism. But it’s not enough to own many leather-bound books and an apartment that smells of rich mahogany, you also have to look the part.

According to the Women’s Wardrobe Guidelines, female anchors should sport “standard business wear, typical of that which one might wear on any business day in a normal office,” like the fetching ensemble seen above on Miss Corningstone.

In Hamper v. Commissioner, T.C. Summary Opinion 2011-17 (2011), one female anchor felt the cost of such professionalism should provide a rather hearty tax benefit. The taxpayer deducted the cost of her “work” clothing – which included business suits, lounge wear, a robe, sportswear, lingerie, cotton thong underwear*, and evening wear — as unreimbursed employee expenses. The Tax Court, as you might imagine, had a different view.  

Relevant Law: While Section 162(a) allows a deduction for ordinary and necessary expenses of carrying on a business, Section 262 expressly denies a deduction for “personal, living, or family expenses.”

Courtesy of decades-old case law, the rules for determining whether the cost of clothing is deductible as an ordinary and necessary business expense are well established. If the answer to all three questions below is “yes,” you’ve got yourself a deduction.

 1.    Is the clothing required or essential in the taxpayer’s employment?

2.    Is the clothing not suitable for general or personal wear?

3.    Is the clothing not worn for general or personal wear?

Court’s Decision: The Tax Court, citing previous case law, held that while the clothing may be required as part of the taxpayer’s employment, it was also plenty suitable for everyday personal wear. Just because a news anchor chooses not to wear their on-air attire outside of work does not mean it isn’t appropriate for those purposes. After all, even the ever-professional Papa Burgundy liked to kick back on the weekends and lose the suit in favor of something a little more comfortable.

Since the business clothes could be worn for everyday use, even though they apparently were not, they failed to satisfy the three-part test, and represented non-deductible personal expenses.

 *note to self: in light of court’s decision, reconsider planned deduction for celebratory “April 15th” thong

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While I confess to not really following the Oscars – I still haven’t forgiven the Academy for its egregious omission of “I’m Gonna Git You Sucka” from the candidates for Best Picture of 1988 — I am fascinated by one of the ancillary elements of the film industry’s big night: the gift bags given to each and every nominee.

These bags raise two interesting issues.

First, I find it a tad unsettling that celebrities, whose lives are already made cushy courtesy of their private jets, personal chefs, and robot butlers*, are lavished with bags of free swag with an estimated value in excess of $100,000.

Second, and much more germane to this blog, I have to ponder if the IRS has addressed the tax consequences of being handed a bag worth $100K, something few people outside Hollywood, the mafia or the USC football program will ever experience. Please tell me the James Francos of the world will at least pay tax on their good fortune, right?

Of course they will.

In the eyes of the IRS, any accretion to wealth represents taxable income, barring some statutory exception. Now, I don’t know where you come from, but $100K certainly qualifies as an accretion to wealth in my neighborhood, and the IRS agrees.

In fact, in 2006 the IRS announced that it had reached an agreement with the Academy to insure that gift bags were being treated appropriately by the recipients for income tax purposes. The IRS clarified their position with the following Q&A:

Q: What are the federal income tax consequences to a person who accepts a gift bag in recognition of involvement in an awards show?

A: In general, the person has received taxable income equal to the fair market value of the bag and its contents and must report that amount on his or her federal income tax return.

Q: If these are gifts, why do they have to be treated as income?

A: These gift bags are not gifts for federal income tax purposes because the organizations and merchants who participate in giving the gifts bags do not do so solely out of affection, respect, or similar impulses for the recipients of the gift bags.

Q: Can the recipient take a charitable contribution deduction if he or she contributes the gift bag to charity?

A: If the gift bag is donated to a qualified charitable organization, the recipient may be able to take a tax deduction for his or her charitable contribution, subject to applicable limitations and requirements. But this does not change the taxability of the value of the items. The fair market value must still be reported on the celebrity recipient’s federal income tax return.

So to summarize,  merely for showing up nominees incur a federal tax in the neighborhood of $35,000, regardless of whether or not they use the goodies. It almost makes me feel sorry for James Franco.

Almost.

*may not actually exist at present

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In 2007, Reade Seligmann was one of three Duke Lacrosse players accused of the rape of an exotic dancer. All three athletes were eventually exonerated in a case so mishandled, the original prosecutor was charged with ethics violations and eventually disbarred. Duke University also received heavy criticism for their handling of the scandal, and entered into a financial settlement with each of the athletes for an undisclosed sum.

Four years later, Mr. Seligmann finds himself in trouble of another sort. On February 17, the IRS filed a federal tax lien claiming Seligmann owes the IRS $6.5 million in tax from 2007. That’s right, I said million.

So how does a kid two years out of college and currently attending law school end up owing the IRS more than I’ll earn in two lifetimes?

We can only guess, since the IRS doesn’t disclose the computation of the tax due, but all indications point to that 2007 settlement being the genesis. And if that’s the case, based on the tax rates in place in 2007 it would appear Seligmann settled with Duke for an amount nearing $20.0 million. Twenty. Million. Dollars. That’ll buy enough pastel Lacoste polos, hemp anklets and rainbow flip flops to keep any lax’er happy.

Assuming Seligmann’s tax bill is not a miscalculation, as both Seligmann and his attorney maintain, and further assuming it relates solely to that Duke settlement income, then how did he run afoul of the IRS?

This is only conjecture, of course, but perhaps Seligmann’s CPA took an aggressive approach to IRC Section 104 when determining the taxability of the settlement.

In general, Section 104 excludes from income settlements on account of “personal physical injury or physical sickness.” It does not, however, exclude from income settlements on account of emotional distress, depression or other non-physical injuries[i] .

Perhaps Seligmann’s CPA took the position that the settlement was excludable on the premise that the false accusations resulted in physical injury, with the IRS believing the accusations caused emotional harm, with no underlying personal harm.

If that is indeed the case, it’s no surprise Seligmann drew the ire of the IRS. No tax due on $20 million of income is what we in the business refer to as a bit of  a “red flag.” 
Tony

[i]  See Parkinson v. Commissioner, TC Memo 2010-142 (2010)

 

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Mission Statement

Albert Einstein once said, “The hardest thing in the world to understand is the income tax.”

Now, don’t let the haircut fool you, Al was one sharp dude. After all, this is the man who gave the world E=mc², the theory of relativity, and an awesomely ironic name to call your wife when she pushes on a door clearly marked “Pull.” * If he can’t figure out whether he’s entitled to a charitable contribution deduction, what chance do the rest of us have?

A pretty good one, actually. Because while Einstein had plenty going for him, one thing he lacked was access to the internet, and the web — in the right hands — has a remarkable ability to boil 4,212 pages of Internal Revenue Code down into something a bit more manageable.

If this blog were to have a mission statement, it would be to help one man with an unkempt ‘do and a family recipe for delicious bagels garner a little better understanding of the many nuances of tax law. We’d like to think that if Einstein were still with us, he’d stop by this site, digest our discussions of court decisions, rulings, and law changes, ruminate on our tips and commentary, and leave here a better, wiser man; one capable of filling out Schedule D without a hint of trepidation.

*not recommended

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