If your castle is your home, can it also shelter taxes?

 

Daniel B. Kenerly lives with his family in a castle in Gwinnett County , Georgia . The Moorish style castle has thirty rooms. In front it has three brick turrets: one contains a living room; one contains living areas, and the other one contains Kenerly's office. It has an outside wall in the same motif as the building with a bridge over the moat. One room, on the ground floor, was used as a hangar for his airplane. Otherwise, the castle included the usual rooms found in a large home except that it had several “secret rooms.” It was on 10 acres of land with a 1500 yard runway.

 

Kenerly used his castle for advertising his real estate business to impress homebuyers and lord it over visiting realtors. It was the subject of several newspaper stories.

 

In the year examined by the Internal Revenue Service, he had deducted $500 for bridge repairs, $2,000 for insurance and upkeep and $9,000 for depreciation, a total of more than $11,000. The IRS did allow $1200 because of his office and hanger space for the airplane he used in his business.

 

In court, he said he should be allowed two-thirds of the castle expenses as business advertising.

 

The court disagreed. Where the acquisition and maintenance of a building are primarily motivated by personal considerations, the deductions must be disallowed.

 

THE MORAL: A man's home may be his castle, but it won't protect him from the long arm of the IRS.

 

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The IRS also challenged the Boomershines who owned a Tulsa , Okla. , business that built metal buildings. The couple had the company name painted on race cars. In the two years the IRS examined, the company deducted $52,823 for auto racing expenses.

 

The IRS tore down those deductions.

 

In court the Boomershines showed that many people who used their services attended car races. They established several business contacts and won two contracts because of the advertising. The judge allowed the deductions.

 

Planning tip: For unusual promotional methods, follow the Boomershine case. Keep records of new jobs and new contracts that might result in future business.   

 

THE MORAL: In racing for deductions, connect activity with business.