A case of questionable taste and questionable tax deductions

From "Suits & Sentences," a blog written by Michael Doyle:

September 15, 2009

The lawyer, the hooker and the tax deduction

Say this about New York attorney William G. Halby: He's pretty darn ballsy.

As recounted in a U.S. Tax Court case decided Monday, Mr. Halby in 2004 claimed a $65,934 tax deduction for his use of prostitutes and a $2,368 deduction of sundry books, videos and pornographic magazines. For 2005, Mr. Halby claimed $5,005 worth of deductions for books, videos and pornographic magazines and $42,152 for prostitute services.

There was no explanation for the fall-off in commercial sex use.

As noted in the Expatriate Owl blog, Mr. Halby had previously lost a state tax case over similar issues. Nor did the IRS did not look kindly on the medical deductions. As U.S. Tax Court Judge Joseph Robert Goeke noted:

"Petitioner did not visit these prostitutes as part of a course of therapy prescribed by his doctor, nor did petitioner ask his doctor to prescribe any sort of sex therapy. Petitioner kept track of these visits in a journal. The journal included the date, the name of the “service provider”, and the amount. Petitioner did not discuss these visits with his doctors afterwards to determine their impact on his health."

Mr. Halby nonetheless argued that he should be able to deduct expenses because of the health benefits associated with a good sex life. The judge, though, reasoned that a tax deduction can't be allowed for an illegal activity -- frequenting prostitutes -- nor for porn that wasn't prescribed by a therapist. Stated the judge:

"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 (regulations and)...caselaw do not support his claimed deductions. Accordingly, petitioner is liable for the (tax) penalty."

Accordingly, Mr. Halby is on the hook for a $21,491 tax deficiency and a $4,298 penalty.