Meet the Street: All's Fair in Love and Taxes?

When it comes to creative accounting, even Enron probably doesn't have anything on what individuals try to get away with on their tax returns.

Try a collection of porn tapes as a business expense, or someone's pet dog as a dependent. Sometimes people even manage to get away with the most unlikely or unsavory claims, says Grace W. Weinstein, author of the Complete Idiot's Guide to Tax-Free Investing and 11 other books on personal finance.

Grace W. Weinstein Author, Complete Idiot's Guide to Tax-Free Investing

Recent Meet the Streets

American Express Financial Advisors' Clay Hoes

Pew Internet and American Life Project's John Horrigan

American Skandia's Wade Dokken

Rice University's Peter R. Hartley

Fodor's Travel Publications' Melisse Gelula

RBC Capital Markets' Gerard Cassidy

Here Weinstein discusses some of the more outrageous cases and claims she's heard of, including a gangster who succeeded in writing off his legal defense costs and an embezzler who managed to avoid paying taxes on the money he stole.

TSC: What are some of the more unusual tax returns you've come across?

Weinstein: There have been some fairly wacky cases out there in the U.S. Tax Court. Would you believe that the tax court ruled in favor of a mobster who tried to deduct his legal defense fees as a business expense? The IRS wanted the money, and the tax court ruled in favor of the gangster. They said that even though the "business" was bookmaking, loan sharking, extortion, illegal gambling, trafficking, stolen property and fraud, he was legally in his right to deduct, as a business expense, the fees that he paid to his criminal defense attorney.

The exact wording that the court used was, "The taxpayer's business was organized crime, not a single gambling operation, and his intention to embezzle from the gambling operation and launder other illegal earnings showed a genuine intention of making a profit. Therefore, the expenses are deductible." Bizarre as that may be, it's also quite wonderful, in a perverse sort of way.

Another criminal, this one an executive who was skimming several hundred thousand dollars from his company, which he used to pay kickbacks to other companies to get business, succeeded in convincing the IRS that because he was, as his attorney put it, only the "conduit" through which these monies [passed], he did not have to pay taxes on the money he stole. He never argued with the IRS about having taken the money. He willingly told them he had taken the money in order to stress he was a mere conduit. The tax court agreed with him, and said that the bribe money could be excluded from his income taxes.

TSC: Have you come across cases concerning more ordinary folks?

Weinstein: Here's a case where a dentist ... tried to put a new spin on an old adage, "An apple a day keeps the dentist away." There was a dentist who tried to convince the government that he had a single partnership business made up of his dentistry practice and an apple orchard. He said apples were very much a part of keeping your teeth healthy, so he grew apples. The court said the two were two separate entities, and he could not write off the cost of running the orchard.

Here's one who had what we here in New York would call chutzpa. A gentleman from Ohio was convicted in 1992 of filing a false 1984 federal income tax return. Along with the interest and penalties, he was slapped with a $10,000 fine, which he paid. Well, on his 1993 return, the IRS noticed, among other shenanigans, that he had a rather large deduction, supposedly in connection with legal and professional services connected with his owning and renting an apartment building.

Upon further inspection, the IRS found he was trying to pass along the $10,000 fine in those professional deductions. He didn't win. In fact, the court was quite displeased and called it a high disregard for the tax code.

TSC: What about outrageous deductions?

Weinstein: As unusual as it may be, many executives and high-net-worth people are perfectly within their right of deducting such things as a chauffeured limousine or a private jet, as long as they can prove these items are used for business purposes.

But then, there are the people who think they can deduct anything and everything. I know of a dentist who thought he could deduct his child support, his groceries, even his erotic tapes, because he said they supported his professional life, and his personal and professional life were one and the same.

I've heard of people who thought they could deduct liposuction. Until recently, in fact, when the IRS began requiring Social Security numbers for children, people were actually getting away with deducting pets as dependents. The answer to all the above is no.

That's about as outrageous as it can get. But I wouldn't recommend testing the IRS or the federal tax court.