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Tax Court Corner: No Deduction for CPA’s Antique Office Furniture

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Oct 4th 2016
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My wife will tell you that I have an addiction. If you ask me, I’ll tell you I have a hobby.

My wife states that I am in denial, but honestly, I can stop anytime that I want to. My hobby doesn’t adversely affect my wife or family because when I participate in it, it’s usually at work or when no one else is around. My hobby does not keep me indoors on a beautiful Saturday or Sunday. I found a workaround for that. So, I don’t see how it is an addiction. Although when I go without it for a period of time, I miss it a lot and think about it. Maybe I do have a tiny problem.

My addiction, I mean hobby, is sports. I was born in Indianapolis and moved to Florida when I was 2 years old. Having lived in the “Football Capital of the United States,” my favorite sport by far is football. High school, college, the NFL, even Canadian football – it doesn’t matter.

On any given Saturday during football season, my DVR will be recording up to six games at a time. In fact, I get upset at my DVR because it can only record six games at one time. On Sundays you will find my oldest son and I in Tampa at the Yucks, I mean Bucs, games. Yes, I am a long-suffering Tampa Bay Yucks, I mean Bucs, fan.

When the calendar turns to November, it is time for college basketball and the Orlando Magic. The Hoosier in me loves college basketball. I am not a big NBA fan, but I follow the Magic because I am in Orlando. My favorite college conferences are the Big East, Big Ten, Pac-12, Atlantic 10, and the Big 12.

Springtime comes and it is baseball season. I spend about $150 a year on MLB Extra Innings so I can get all of the games. My favorite teams are the Chicago Cubs (my wife is from Chicago), the Los Angeles Dodgers (I am a UCLA alum), the Minnesota Twins, and the Cleveland Indians.

Summertime is still baseball season, but there are other sports. Soccer is huge in Orlando, which got an MLS team two years ago, and we have season tickets. Other teams I follow are the Tampa Bay Rowdies in the North American Soccer League and Arsenal in the English Premier League. In the Canadian Football League, I follow the Montreal Alouettes and the Edmonton Eskimos, and during the baseball All-Star break this past summer, I discovered Australian football.

Now that I think of it, maybe I do have a tiny problem. I watch a majority of these sports at work – meaning they are on in the background. I hear the play-by-play call and when the audience breaks out in a loud cheer, I’ll glance over at the game. I have three monitors in my office – two are actually 42-inch TVs. I use one to see the source documents that I need at any given moment, one screen I’m working on, and the third screen has the game.

And there’s more. I have many collections. I have a large selection of jerseys; I especially like the most obscure jerseys a team wears that you can barely find. In fact, I have bought so many jerseys that I get them at cost now with just a small markup. I actually have a jersey consultant who checks in with me every so often to tell me the new and obscure jerseys that they have in my size.

In addition, I collect suits and French cuff dress shirts, and with the French cuffs comes my collection of cuff links. At the office, I collect sports memorabilia: I have signed baseballs, baseball cards, footballs, mini helmets, even a collector’s edition unopened box of cereal. My argument with my wife when I bought these items (and there was an argument) was that they were tax deductible.

I recently stumbled upon the Tax Court case Kilpatrick v. Commissioner, TC Memo 2016-166. Sam Kilpatrick filed the case pro se, probably because he is a licensed CPA out of Georgia. As it turns out, he is a collector as well. He collects antiques and works of art.

His main job is with a CPA firm in Georgia, but he started his own CPA practice on the side, and on his tax return he had a Schedule C that incurred a loss and approximately $40,000 in unreimbursed employee expenses. He was audited, and you would think that he would know better than to file a tax return with a Schedule C loss, then turn around and have $40,000 in Schedule A unreimbursed employee expenses.

His home office was decorated with antique chairs and desks. In addition, he had several oil paintings that he had purchased that hung in his home office. Kilpatrick deducted these items as office expenses, and the total of the purchases was about $10,000.

The IRS issued Kilpatrick a notice of deficiency for the 2009 and 2010 tax years because at the audit, he disagreed with the IRS disallowing some of his Schedule C and Schedule A deductions.

The Tax Court agreed that Kilpatrick passed the “regular and exclusive use” test for the home office, but it denied the deduction for the antique furniture and oil paintings because these expenses did not fall under Code Section 162(a), which allows a deduction for “ordinary and necessary” business expenses. These costs, the Tax Court said, were capital in nature, and capital expenses are not ordinary and necessary. The court also stated that the items were not office expenses because the amount per item was too high.

In addition, the court entertained the idea of the expenses being capitalized, but it quickly disregarded that notion because a depreciation deduction is for “wear and tear.” The fact that these items would increase in value precluded them from being depreciated.

Now back to my collection of sports memorabilia. I have a separate office where my collection is displayed, which also serves as our conference room. When I meet with a client, we go into that office and the memorabilia is basically the decor. Would the fact that the memorabilia increase in value preclude those items from being deducted? Or would the fact that my collection costs nowhere near $10,000 weigh in? In totality, it was probably more like $1,000, maybe.

So, I am asking for your comments. What do you think?

Replies (7)

Comments for this post are now closed.

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By skinnyvinny
Oct 18th 2016 10:57 EDT

Good article, Craig. I disagree with the Tax Court. The disallowing of items "because the amount per item was too high" is nonsense to me. Says who? As long as the item has a business purpose, the cost should be irrelevant. If I have a skilled artisan make an ornate desk out of a rare and exotic wood, is that "too much and unnecessary?". I'm going to use the desk every day. Or am I supposed to buy cheap particle board [***] from Ikea and Wal-Mart because "that's good enough and get's the job done". Should I not have artwork on my walls, either?

I also disagree with the tax court on "the fact that these items would increase in value precluded them from being depreciated".

No, it just means you'll have a very large gain in the event you ever decide to sell. So, if possible, hold onto the stuff until you pass on so your heirs can enjoy a step-up in basis.

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Replying to skinnyvinny:
Sheridan Vernon EA
By SHERIDAN
Oct 18th 2016 23:27 EDT

I agree with this post about price and quality and about it increasing in value. The tax court must have felt pressure from the IRS that everyone would buy antiques or other furniture for their office and take large deductions. But what about the office furniture in Donald Trumps office....I bet that cost way more than 10000 and is it ordinary or necessary and certainly of high cost.....so I think it s fair to take the depreciation section 179. Perhaps he needed to do it that way rather then as office expenses.

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Replying to skinnyvinny:
Craig Smalley
By Craig W. Smalley, EA
Nov 9th 2016 14:39 EST

Honestly, I would appeal to the circuit court if I were the taxpayer. So, just for conversation's sake, let's say my non-home office had antique furniture and expensive paintings. Just because it goes up in value, or is excessive in cost, does that mean that it isn't deductible? Who is the authority that sets the excessive requirements?

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Sheridan Vernon EA
By SHERIDAN
Oct 18th 2016 23:23 EDT

because the amount is reasonably low for office furniture I would say it s fine. Ordinary and necessary .....for the intrigue of the client why not. In the end I think they are ok.

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Sheridan Vernon EA
By SHERIDAN
Oct 18th 2016 23:32 EDT

If it were in a museum and on display it might go up in value.....if it s being used every day likely there is wear and tear so surely should be able to depreciate. Tax court was over influenced by IRS that if they didn t rule for IRS this would become a serious loop hole.
I guess one question is, is it ordinary....not
is it necessary ......not unless he dealt with many antique dealers or perhaps he needed the fluff of success to convince clients of his expertise and high prices.

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Craig Smalley
By Craig W. Smalley, EA
Nov 17th 2016 12:06 EST

In my office, like i said I have sports memorabilia. I try to buy it low. I watch so many sports, that I can usually tell when someone is going to be good. One prize possession that I bought after the all star break last year was a Kris Bryant signed rookie card. He won rookie of the years, and this year he might win NL MVP. His card has gone up in value considerably. This year I did the same thing with Corey Segar, who is the shortstop for the Dodgers. He should win NL Rookie of the year. The point is that it is necessary and ordinary in that I bought these as decorations. If it were questioned and TC denied it, I would appeal to circuit court

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Replying to Craig Smalley:
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By nictindall
Jan 16th 2017 10:56 EST

Craig, this has been an interesting write up and subsequent conversation.
I am a working adult who is going to law school at night and am doing a case brief on this specific case. I have spent some time researching this matter and reading everything I can regarding this case. That is how I found this conversation.

I have actually reached out to the judge and IRS attorney for more insight than just the case itself.

The reason for my reply is I have noticed a couple commentators discussing the court stating the amount was too high per item and the reasoning behind it. There has been a history of case law allowing depreciation regarding antiques if they are wearable items: Liddle and Simon.

Either the judge wanted to get away from this practice, did not feel Kilpatrick showed proof the chairs were wearable (which is what i believe), or that Kilpatrick was so negligent in his tax filings that the judge just ruled for the IRS in much of the case. Judges are humans, and I have noticed, in my limited time of studying law, that judges do rule against common law if they are upset by a certain defendant/plaintiff. The judge discusses the burden of proof is on Kilpatrick to show the chairs are indeed wearable antiques, and since Kilpatrick was trying to claim them under office expenses and deductions, he never showed any proof about the wearability of the chairs. But then the question becomes: why did the judge go to depreciation when Kilpatrick did not request it?

I too collect sporting memorabilia, so your write up caught my attention. May I ask, do you believe there is another potential reason for the judge ruling against common law in the prior cases? As accountants, do you see a reasoning other than I have stated? Furthermore, do you see this impacting a lot of clients? I would assume this would be a uncommonly used depreciation deduction.

Thanks for your time,
Nick

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