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Don't take your work into the bathroom

July 30, 2009

It's only natural for an entrepreneur to get aggressive in deducting expenses. The Tax Court yesterday said a Shaklee dealership went a bit overboard.

An Oklahoma couple set up their Shaklee business in a C corporation. The corporation, RS Tyson and Accociates, Inc., used its owners as one of its principal vendors. They presumably used this structure instead of a Schedule C sole proprietorship to avoid self-employment taxes. The corporate deductions for 2003 included, among other things:

- $24,000 in rent paid for corporation use of the couple's home
- $12,000 paid in "equipment lease" charges to the couple
- $4,209 in "travel expenses" on behalf of the couple.

The Tax court Provides some details. On the lease, the Court says:

RS Tyson deducted rental expenses for the use of Mr. and Mrs. Tyson's home of $24,000 for 2003. RS Tyson claims that during 2003 it rented most of Mr. and Mrs. Tyson's home for Shaklee business purposes. Supposedly, Mr. and Mrs. Tyson's living room was the meeting room, the dining room was where training and makeovers took place, the kitchen was where Mrs. Tyson made "Shaklee shakes", and the bathroom by the office also was used for makeovers. The dining room was where Mr. and Mrs. Tyson ate dinner...

The purported rental agreement has little reality beyond tax planning. The purported rental was not at arm's length, and we disregard it for lack of economic substance.

The judge didn't care for the travel costs either:

RS Tyson has not established how the cost of a family trip for Mr. and Mrs. Tyson to Disneyland and a personal trip for Mr. and Mrs. Tyson to Branson, Missouri, were ordinary or necessary to its businesses. Furthermore, RS Tyson has failed to substantiate the claimed travel expenses in accordance with sections 162 and 274. Accordingly, we sustain respondent's determination on this issue.

In addition to disallowing the deduction, the Court upheld penalties for taking unsupported deductions.

While the Tax Court opinion doesn't say so, the involvement of a Shaklee distributor and the presence of a Des Moines-based attorney for an Oklahoma taxpayer couple may indicate that the return was prepared by a suburban Des Moines tax firm that is fighting an IRS injunction lawsuit. The preparer didn't testify in this case, which the judge said was a bad fact for the taxpayers.

Cite: Tyson, T.C. Memo 2009-176

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Mr. Kristan-

We always referred to the "jake" in our tax office as the "law library". It was where we would go to do our research.


RDF: Too much information!

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