From the April 2006 issue of Wealth Manager Web • Subscribe!

The Outer Limits

In every human endeavor, there are a few pioneers who expand the fields of possibility-- brave test pilots who fly off into the wild blue yonder with no fear that they might very well crash and burn.

Tax avoidance is no exception. Even as most of us meekly take shoeboxes of receipts down to our accountant or dutifully plow through TurboTax, then brace ourselves for the bad news, a few hardy souls out there won't take "owe" for an answer.

Take the Amway salesmen who tried to write off the cost of their dogs' food. Their claim: The dogs were guarding their inventory. "In fact, as I recall, one of the cases was particularly funny because it was a small dog, it was a poodle or something," says Thomas P. Ochsenschlager, vice president of taxation for the AICPA. Unsurprisingly, Fifi's owner lost.

Or consider one of Jim Moll's favorites. Moll, a tax law professor at Villanova University in Villanova, Penn., likes the case of a graduate of NYU Law School who tried to deduct the tuition for his master's degree in tax law as a tax preparation deduction.

"Well, why not?" asks Moll, "I mean, If I can get a deduction for paying H&R Block to do a tax return, I can get a deduction for purchasing TurboTax, I can get a deduction for the equivalent of Tax for Dummies, or whatever that little book is...that would be deductible. What if H&R Block has a $75 three hour seminar?" And what if that seminar were to last not three hours, but a year? Despite a degree in tax and a degree of logic on his side, the fledgling tax lawyer lost.

With such chutzpah, however, he has probably gone far in his profession. Other lawyers have tried to claim that because they charge by the hour, time is very important to their practice-- important enough to justify writing off a $42,000 watch, according to stories heard by Ochsenschlager. Another lawyer, a tax specialist in Los Angeles, attempted to write off his yacht as a business expense. "He named the boat the SS 1040 and so he argued that that ought to be an advertising expense for his practice," says Paul Caron, a professor of tax law at the University of Cincinnati College of Law. He lost, too.

Lawyers aren't the only profession that includes members who feel the government should subsidize a rock-star lifestyle. Stevie Nicks, the singer of Fleetwood Mac fame, once tried to write off the cost of her clothes. The rule is that you can't take a deduction for work clothes you wear on the street. Nicks argued she couldn't actually wear the clothes she used in her concerts because she always sweated through them. How did that work out? We'll probably never know. "Unfortunately, she settled with the IRS out of court so there's no final ruling in that case," says Caron.

Ochsenschlager recalls the case of the salesman who tried to deduct his toupee, saying he needed it to project the right kind of image. The tax court didn't give him the nod. On the other hand, according to Ochsenschlager, the judges did uphold the deductibility of a topless dancer's breast implants, agreeing with her that they did constitute a legitimate business expense.

Medical excuses may work. Swimming pools sometimes are approved, according to Ochsenschlager, "because the doctors suggested [the taxpayer] needed exercise, specifically swimming exercise." But if you live in the north and try to take the pool deduction, go for an indoor pool: "I guess an outdoor pool might work in a place where you could swim every day--Florida or something--but certainly in the Northeast or the Midwest, to justify the deduction, you'd almost have to have an indoor pool because otherwise you'd be virtually admitting that you're not using this thing on a daily basis for your therapy," Ochsenschlager advises.

Of course, some of the most creative tax ideas of all still remain theoretical, for now. Like physicists who enjoy thinking about riding on trains that roll along at the speed of light, tax law professors seem to thrive on absurd thought experiments. One case in point: Actor William Shatner recently sold his kidney stone to a Star Trek fan thrilled to get a unique memento from his favorite space captain.

After selling the kidney stone at an online auction for $25,000, Shatner reportedly donated the money to Habitat for Humanity. "Tax issues abound," wrote an enthusiastic Bryan Camp, a professor of tax law at Texas Tech, in a post to Caron's tax law Web log. "Does Shatner have income on the sale of the kidney stone? If so, how much: what is his basis in the kidney stone? Should he instead have donated the kidney stone directly to Habit for Humanity? If so, how would he have established the value of the charitable donation?"

Bennett Voyles is a New York-based financial writer.

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