Content area
Full Text
The same week a jury began deliberating whether Leona Helmsley committed tax fraud, another conspicuously consuming New Yorker was put on trial, in a way. Malcolm Forbes encountered so much flak over his gala $2 million birthday party, he was forced to say that he wouldn't "deduct a penny."
But while tax experts agree that testimony against Mrs. Helmsley shows she went too far, they can't come to a consensus on whether Mr. Forbes got a raw deal.
"If it came down to it, Forbes could have made a case that his party was a business expense," says Robert L. Israeloff, executive partner of the Valley Stream L.I.-based accounting firm Israeloff, Trattner & Co.
"No way," counters Columbia Law School professor Marvin Chirelstein. "You can't deduct a private party. Life consists of one encounter after another with business associates. It's a wobbly defense."
That debate continues as the Helmsley and Forbes cases raise new questions over what is a permissible deduction and what will get a business person in trouble. And as tax professionals probe the issue, they concede that there are no absolute guidelines.
"Yes, there are regulations dealing with deductibility," Mr. Israeloff says. "At the same time, things are not clear-cut."
The paradox originates with the Internal Revenue code, an arcane series of rules that are open to diverging interpretations. On the one hand, the IRS seems liberal, stating that any expense that is "ordinary and necessary for business expenses" is deductible.
But the tax code further limits deductions by forcing the taxpayer to show a clear connection between an expense and his business. That means, for instance, a businessman would have a hard time justifying a deduction of his daughter's wedding, even though the sound of weeping violins might create good will among his business-related guests.
"Over the years, a series of new rules have evolved that more narrowly interpret travel, automobile and entertainment expenses," explains Mr. Israeloff. "The taxpayer must have more than a general expectation of deriving income from the entertainment expense."
That's why Mrs. Helmsley's defense attorney, Gerald Feffer, has been hammering away at the connection between his client's personal and business lives. Mrs. Helmsley and her husband, Harry, have been charged with evading federal income taxes by...