The line isn’t always clear on what qualifies as deductible investment expenses, but what’s absolutely apparent is that investors can’t deduct costs incurred to attend conventions, seminars, or similar meetings at which they obtain information that helps them select strategies.
Nondeductible expenditures include airfares and other travel costs to meeting sites, attendance fees and meals, lodging and local travel while attending. What prompted Congress to enact this prohibition?
A key factor was the unhappiness of the IRS with the pro-taxpayer position taken by the Tax Court in a dispute involving Lorraine Gustin of Brown Deer, WI, someone who was a serious student of the stock market.
Lorraine devoted a considerable amount of time to managing her portfolio and held posts in the National Association of Investment Clubs, an organization that holds conventions where members can discuss investment strategies with stock market analysts and other experts and listen to presentations from executives about their companies.
During the year selected for audit by the IRS, Lorraine’s pursuit of profits took her to investment club conferences in Amsterdam, Cleveland, and San Diego.
Lorraine deducted her expenses for attending the three meetings, but not those of her husband. Nor did she deduct the cost of their post-convention side trips to places like the Greek Islands and San Francisco. The IRS argued that her expenditures of $2,400 for airfares, meals, and hotel rooms were nondeductible personal expenses since collecting investment information wasn’t the main reason for her treks to conventions.
But the court was convinced by Lorraine’s testimony that “her attendance at the convention was part of a rationally organized investigation into investment opportunities and strategies. It was reasonable to spend $2,400 to protect and enhance a portfolio worth $98,000. Any personal benefits of the trip were secondary to the investment benefits.” Moreover, the information that she obtained at the conventions from analysts and company representatives directly influenced her later decisions on what stocks to add to or remove from her portfolio.
Predictably, those spoilsports at the IRS persuaded an accommodating Congress that Lorraine’s victory should be short-lived. Therefore, tucked into the Internal Revenue Code is a provision that wipes out any tax breaks for investment seminars – a move that made such gatherings less alluring to investors.
A saving grace is that the disallowance applies only to outlays made for investment reasons, like those of investors seeking to obtain information about whether to buy or sell particular stocks. It doesn’t apply when costs are incurred for business reasons, like those of financial advisers who meet with prospective clients as part of their jobs.
To illustrate, International Investors holds conventions at which stock market investors pay for the opportunity to discuss strategies with representatives of brokerage firms and listen to presentations from executives about their companies. Result: While the seminar measure bars write-offs of expenses by investors, it leaves unchanged the rules governing write-offs of expenses by stock brokers and others who are at the conventions for business reasons.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 180 and counting).
Stay competitive with your fellow accountants who turn to the articles when, say, they correspond with clients or they want to show clients how to nimbly sidestep pitfalls while capitalizing on opportunities to diminish, delay, or deep-six payments of sizable amounts that would otherwise swell IRS coffers.
Also be mindful of the articles when you strive to build name recognition, a goal attainable only by choosing and implementing strategies that set you apart from ferocious competition. Use the articles to prepare talks to audiences, such as business owners, investors, and retirees.
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.