An unusual case out of the Tax Court this afternoon. Why unusual? From The Tax Law Report's summary:
For 2004, the taxpayer claimed medical expense deductions of $76,314 on his Schedule A. (3). Included in this amount was $65,934 for prostitutes; and $2,368 for medical books, magazines, videos, and pornographic material. (3).
For 2005, the taxpayer claimed medical expense deductions on his Schedule A of $49,023. (3). Included in this amount was $42,152 for prostitutes; and $5,005 for books, magazines, videos, and pornographic materials. (4).
The taxpayer, a New York attorney (no, not Eliot Spitzer), maintained meticulous records to document his expenses. Unfortunately for him (and maybe for Mr. Spitzer), the Tax Court noted that deductions are unavailable under the tax regulations (1.213-1(e)(1)(ii)) for illegal treatments. Given that prostitution is illegal in New York, and absent a prescription for the "treatments," no deduction could be allowed.
The Tax Court didn't address whether a deduction would be available if he had a prescription "filled" in Rhode Island or Nevada, where such "therapy" is legal.
The court also said deductions were unavailable for pornography on the grounds that it is a "personal" item, rather than a medical item.
Worst of all, the Tax Court upheld a penalty. While the taxpayer disclosed the deductions, disclosure only works if you have a reasonable basis for taking the deductions. The Tax Court said:
Petitioner did not have reasonable cause or a reasonable basis for claiming the deductions at issue. Petitioner has been an attorney for 40 years and specialized in tax law. Petitioner should have known that his visits to prostitutes in New York were illegal and that section 213, the regulations thereunder, and caselaw do not support his claimed deductions. Accordingly, petitioner is liable for the section 6662 penalty.
An Internet search of the taxpayer's name turns up a New York lawyer who is 78 years old. While the deductions may be hard to justify, some of his contemporaries might tip their hats to him for his stamina. Nothing in the record indicating whether Viagra played a role (but it would normally be deductible if it did).
The Moral? No deduction for sex therapy without a prescription. And in most states, even with one.
Cite: Halby, T.C. Memo 2009-204.
UPDATE from The Gothamist:
After the verdict, the defendant William Halby told the Post, "I live a solitary life. I have no social life. I needed that release." So he dutifully documented each liaison in a notebook titled "Tax Journal," in case he ever got audited.
Funny, I would have guessed he had a rather vigorous, if unorthodox, social life.
The TaxProf has more, including some details of Mr. Halby's prior tax difficulties arising from his therapy costs.
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