Summary:
IRS limit tax deductions to a taxpayer's own expenses. So a corporation can't deduct a shareholder's obligation even though it paid the expenses.

The pornographic video business must have been murder in the 1980s and early 1990s because Capital Video bought protection from a member of the Gambino crime family.

Member Natale Richichi didn't come cheap. The Cranston, R. I. company paid him more than $1.7 million to keep other organized crime families from muscling in on Video's business.

Video, owned by Kenneth Guarino, ran smoothly until an adversary, more dangerous than any family, showed up: the Internal Revenue Service.

The agency suspected that Guarino became over anxious to help the crime family. After being charged, he pleaded guilty to conspiracy to obstruct IRS functions and to evade Richichi's taxes. These charges arose from Guarino manipulating Video's accounting records, skimming cash from peep show machines he used to pay Richichi and filing false Forms 1099 with the IRS relating to these payments. He was fined $250,000 and was sentenced to 16 months in prison.

After the trial, Video deducted his legal expenses, which the IRS challenged.

The court said generally you can't deduct someone else's expenses.

Guarino said these weren't his expenses, but the company's. He had helped the family member evade taxes on behalf of Video; that made the legal costs company expenses.

The court disagreed. It said his conspiracy was not sufficiently related to protecting the company. The family probably would have protected Video even if he hadn't filed false Forms 1099. The court disallowed the $767,072 legal expense the corporation deducted.

More at Deductions, Other.