by Michael Lodge
I really love the writer Julian Block who writes a lot of articles on taxation. He writes articles in a format that makes accounting and tax interesting. Here is one of his articles.
Written by: Julian Block – The New York Times of April 7, 2016, reported the death of Merle Haggard, “one of the most successful singers in the history of country music.” He died the previous day on his 79th birthday.
This holding, incidentally, inspired something not previously undertaken by somber judges – composition of a poem that explained in a humorous way why they decided to side with Twitty and against the IRS, arguably the government’s most unpopular agency. (Reclusive author who lived in Oxford, Mississippi, and was known for his lengthy sentences, eat your heart out.)
First, some background. As a general rule, businesses flunk the ordinary-and-necessary tests and lose out on deductions when they voluntarily pay someone else’s obligation. One exception allows you to deduct the repayment of a “moral obligation” when you do so “to protect or promote your own ongoing business.”
The court approved a deduction of $97,000 for Twitty, who felt honor-bound to repay investors and creditors of a corporation involved in a failed franchising business known as Twitty Burger Fast Food Restaurants.
According to the IRS, his reimbursement of the investors was “very nice,” but nondeductible because he failed to link his payments of the corporation’s debts to his business as a performer.
Twitty, though, struck a far more responsive chord with the court, which was convinced that he made the payments primarily to safeguard his personal reputation with his fans and his business reputation in the country-music industry. Some of the investors were themselves country/western stars, such as Haggard. Several had threatened to sue. As his lawyer pointed out: “Imagine trying to keep a band together where somebody [meaning Twitty] has stiffed the drummer’s mother.”
The Tax Court closed with a composition of its own, “Ode to Conway Twitty,” that included these stanzas:
Twitty Burger went belly up
But Conway remained true.
He repaid his investors, one and all,
It was the moral thing to do.
Had Conway not repaid the investors
His career would have been under cloud,
Under the unique facts of this case
Held: The deductions are allowed.
The generous supervisor. Twitty’s triumph notwithstanding, whether the expense in issue is allowable hinges upon the particular circumstances. To illustrate, consider the supervisor who wanted to share a portion of her bonus with her subordinates. The supervisor’s employment contract entitled her to additional compensation if the bottom line was black. Though not obligated to do so, she opted to redistribute part of the bonus to her subordinates. But the IRS ruled that the redistribution was nondeductible (Letter Ruling 7737002).
The reason for this hard-nosed approach? An IRS finding that no employer/employee relationship existed between the supervisor and her subordinates.
Note, though, that the IRS concedes that an employee who, in turn, employs others to assist her can deduct payments to them. Such payments are subject to other limitations. Unreimbursed employee business expenses, along with most other miscellaneous itemized deductions, are allowable only if their total is greater than 2 percent of adjusted gross income. And if an employee is subject to the alternative minimum tax, no deductions for such expenses.