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I LOVE THE DARING NECKLINE ON YOUR UNIFORM

December 16, 2005

Not all Tax Court cases are fun. In another case released yesterday, the Tax Court judge had to wade through over 100 disputed items for a Phoenix multi-level marketing outfit, involving close to $5 million in deficiencies. It looks like the MLM executives tried to deduct everything including their kitchen sink.

For example, the taxpayers built a lavish house and contented that it was deductible because it was not merely a "dwelling," but "a trophy house aka billboard in lieu of money spent for highway billboard or other media purchases, such as radio, t.v. and newsprint." The Tax Court didn't buy it. Just because a house is, as the judge put it, "remodeled to become more grandiose" doesn't exempt it from the tax law's strict tests for deductibility of home expenses.

The taxpayer's ("petitioners") attempts to deduct formalwear peg out the chutzpah meter:

Q And describe for the Court your method of operation with respect to wardrobe or costume for those in your company participating at the conventions?

A Well, if you're going to give the appearance of affluence you have to be capable of looking the part. And obviously wearing a different suit between the morning session and the evening session has bearing on it. More so with the women.

As I said earlier, we worked the tables, both my sons and their wives and my wife. We would visit all 5,000 people. We would talk to all five, shake hands with them, turn around and they would have met all three of the families during that last night at that last time. So it would be imperative that the gowns worn by the girls especially could not be the same ones that they had on at an earlier function because they were always a constant reference at the tables by the distributors saying "What a beautiful gown." "Isn't that gorgeous."

It was obviously over the top type dress. I mean you couldn't wear it to the grocery store or the gym or anything but it was done on purpose so that all the children and everybody else had matching outfits on and it just generated the enthusiasm backwards from them that they wanted to be and participate.

Q * * * The wardrobe we're talking about that was paid for by the companies?

A Yes.

Q And what was the policy as to whether the women could wear the dress more than once?

A No. The dress, once the dress had been seen it could not be seen again.

Q And then what happened to the dress?

A They all went to charity or were just given away to third parties.

Q And what rule, if any, with respect to the men?

A The men was a little bit easier because most of the time they would just have to have tuxedos. Our requirement on the men was that they just couldn't -- you can't just walk into and buy a tuxedo at Men's Wearhouse and expect somebody to say, "Gee, that's a great looking piece of garment." It's how it's tailored and how it fits that has more intensity to it.

The judge was unmoved by the contention that these ball gowns were really work uniforms. Perhaps his attitude was soured by some of the "uniforms":

Assuming arguendo that a once-wear policy would render clothing unsuitable for personal wear in petitioners' particular situation, Mr. Deihl's generalized testimony does little to show that each of the claimed charges was in fact for the purchase of such a once-wear item. As respondent notes, among the Neiman Marcus charges is one showing two turtlenecks at $165 each.

All in all, it was a bad day for the MLM deductions. This case is a study in the weaknesses of the Eddie Haskell approach to documenting your tax deductions.

Cite: Deihl v. Commissioner, T.C. Memo. 2005-287.

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