By: A.J. Cook

For 14 years Joseph L. Flaig of Los Angeles celebrated his birthday with a huge bash: balloons, champagne, a buffet and orchestra with about 1,000 people attending. The parties became so famous local television and newspapers covered them.

He included as guests close friends, insurance people and clients from his personal injury law practice. During the festivities Flaig would mingle with clients and potential clients, have a client sign a will or discuss a legal problem.

When he deducted the cost on his tax return, the Internal Revenue Service didn't find this cause for celebration. It disallowed his deductions for two years, amounting to about $11,000 each year.

When Flaig appealed, the court said these birthday parties were too personal. It disallowed the deductions saying Flaig's chatting and signing documents didn't convert the parties into business meetings.

The Moral: If you only hoist glasses, the IRS will flag the deduction.

One of the IRS's favorite targets for disallowance is a deduction for parties. Attendance by friends and relatives make the taxman's victory in court a cinch. But the IRS thought it had an easy win for a party costing $347,000 where business discussions were impossible because of the noise.

Robert and Frances Moore out bashed Flaig. Their annual party featured a big name entertainer -- one year Barbara Mandrell -- a cocktail hour, a seated dinner and dancing.

That year the Moores had developed 15 real estate subdivisions in Chesapeake, Virginia. They also built and sold a number of houses. Sales totaled $57.9 million.

They limited the party guests to real estate agents who had sold two or more homes constructed by the Moores. During the evening Robert Moore addressed the agents and thanked them for selling his homes and encouraged them to sell more.

The IRS disallowed the $347,000 deduction.

In court the Moores admitted they conducted no substantial business dialogue during the party. Even so, the court allowed the deduction. Though the entertainment distracted individual business discussions, everyone at the party knew the Moores were promoting their business. And, equally as important, no meaningful personal or social relationship existed between the taxpayers and the people attending.

April’s not normally the time for celebration, but it’s a good time to think about using parties as a tax deduction.

Some expenditures are deductible. The law says parties for all employees, and for clients or prospective clients before or after a business meeting are deductible. All other party-type questions depend on the courts to say which affairs are primarily business and which are not.

A Rabbi, with a congregation of 725 families, threw a big party after his son’s bar mitzvah and invited the entire membership. The court disallowed the deduction, saying he was celebrating a personal event not a business event, like raising money for the temple.

A new anesthesiologist knew he needed referrals from surgeons in the community. To reel in business, he entertained doctors on his 31-foot fishing boat. He kept a log of the date, time, guests and amount of business hooked on each trip. Some doctors testified they discussed medical problems while aboard. This gave the anesthesiologist the opportunity to explain his qualifications. The court allowed the deductions.

An oral surgeon threw a big party that cost $4,000 and was attended by 200 of his closest, personal business associates. Getting a deduction out of a party that size was like pulling teeth. Rejecting the deductions, the court stated “Surely he could not have expected to have had substantial business discussions with all or even most of those attending.”

THE PLANNING TIP: Under current law, most entertainment costs are only partially deductible. Nevertheless, whether it’s a big noisy event or intimate discussions, if it’s not before or after a business meeting, promote your business and limit invites to people who can benefit your business.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

Copyright © 1987-2001 A.J. Cook All Rights Reserved
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Released 3-31-97 and 4-12-99