Can Charlie Sheen Deduct His Hookers?

March 1, 2011 -- If Charlie Sheen, come April 15th, tries to deduct his hookers from his taxable income, he won't be the first man to try. William G. Halby has bravely blazed that trail before him.

The retired Brooklyn lawyer's deductions for prostitutes, massages, pornography and other sex-related activities were claimed as "medical expenses." Halby's disallowed deductions included $40,588 for "therapeutic sex," $70,776 for "massage therapy to relieve osteoarthritis and enhance erectile function through frequent orgasms" not to mention $2,173 for "pornography to enhance sexual performance in lieu of taking Viagra."

Patronizing a prostitute, the tax court somberly noted, is illegal in New York. Neither Halby nor any other taxpayer can claim a deduction for an illegal treatment (no matter how "therapeutic"). The court, however, did affirm Halby's right to deduct $6,308 in doctor visits, prescription drugs and other medically-justified services.

Every tax season has its odd and shameless deductions. Recent doozies have included:

Arson. A Pennsylvania owner of a failing furniture store hired an arsonist to burn it down, and up it went in smoke. The deceived insurance company paid off. On his tax return, the fraudster dutifully recorded the $500,000 payment from the insurer; but, not content with that, he then tried to write off as a "consulting fee" the $10,000 he had paid the arsonist. It was a claim too far. The IRS smelled a rat, and the shopkeeper was fined $6,000 went to jail.

Thong underwear. An Ohio TV news anchor claimed as her work-related deductions teeth whitening, manicures, pedicures, gym fees, clothing, dry cleaning, self defenses classes, subscriptions to Glamour and Cosmopolitan, and lingerie--including thongs--some of it purchased from Victoria's Secret. Her claimed deductions came to $167,356 in all. The U.S. Tax Court ruled against her, judging them to be personal expenses.

Tax expert Paul Caron, a professor at the University of Cincinnati College of Law, collects such gems the way the late Malcolm Forbes collected jeweled eggs. Asked why tax claimants grossly over-reach, he advances several explanations besides outright fraud:

First, goofy-sounding deductions sometimes are legit.

The IRS, for example, has permitted a farmer in Louisiana to deduct the depreciation of his ostriches. The cost of Navajo healing ceremonies likewise are deductable, provided they have been prescribed for a medical purpose or to alleviate a medical condition (in the same respect that other alternative treatments, including electroshock and hydrotherapy are deductable if properly prescribed). A professional bodybuilder may deduct the cost of his body oil.

Last, but by no means least, stripper Chesty Love was permitted to deduct the cost of her breast implants, which were determined by the IRS to meet the test of being "ordinary and necessary" for her work.

Professor Caron says other claimants over-reach because they're tax protesters bent on showing the IRS who's boss, or because they believe, mistakenly, that their own notions of equity match the IRS's. In the last category he puts the female TV anchor, whose own personal test of something's being business-deductable was to ask herself (according to her own account): Would I be buying this if I didn't have to wear it to work?

The IRS determined that the clothing, while appropriate to the workplace, was not inappropriate for the anchor's personal use, and, as such, ought to be treated as a personal expense.

"People go into tax court," says Caron, "because they think 'X' ought to be deductible in their ideal vision of an ideal tax world. They don't take into account the law as it stands." Better they should adopt, he says, Donald Rumsfeld's approach to war, which he paraphrases as: "You go to war with the army that you have, not the one you wish you had."

When it comes to business deductions, he says, it's the presumed deductibility of laptops and other computers that most often gets employees (as distinct from independent contractors or consultants) into hot water:

"If someone is an employee," says Caron, "it's virtually impossible to deduct a laptop that you use at home for office-related work as well as for personal stuff." On the other hand, an employee who can prove he has a business on the side—a journalist, say, selling freelance pieces to buyers other than his employer, or a university professor moonlighting as a consultant—may be able to take a legitimate deduction.

The AGI Test

Employees face the further hurdle that they can deduct employment-related expenses only if they exceed 2 percent of adjusted gross income. If your cheapskate boss requires you to read the Annals of Taxidermy and requires you to pay the $100 subscription fee, chances are you're out of luck—unless, of course, you're getting paid just $5,000.

Filers tempted to deduct the business use of cell phones, he says, ought to go ahead and do so this year. "The IRS somewhat recently announced it was softening its approach to cell phone deductibility," he explains.

The old policy dated from a time when cell phones were new and calls costly. "Cell phones were these exotic things the size of a shoebox. As written, the law required taxpayers to account separately for each call they made and to allocate calls between personal and business use."

Now the IRS has implicitly admitted that policy is silly, since the cost of calls has plunged and the phones themselves are cheap enough to be almost universal. "The IRS has backed off on that requirement," says Caron. "There's no need anymore for that kind of picayune documentation."