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The Court has permitted a taxpayer to deduct the cost of clarinet lessons for a child whose orthodontist recommended them, and a psychiatric patient got away with deducting automobile expenses because his psychiatrist prescribed driving as therapy. But the Court disallowed the cost of dancing lessons for a surgery patient, although a doctor recommended dancing for postoperative therapy. A taxpayer is permitted to deduct educational expenses if they enable him to keep his job, but not if they enable him to get a better job. A specialist in internal medicine, for example, was allowed to deduct the cost of psychoanalysis (he said it would help him be a better internist), but a psychiatrist was not allowed to do so since analysis might help him become a psychoanalyst—and thereby make more money.
A Bet on a Horse. The IRS's efforts to grapple with tax delinquents sometimes gets the agency into comically grotesque postures. The wife of a rich Texan got mad at her husband, told the IRS that he had been finagling on his tax returns. As an informer, she got a $50,000 payment —a portion of the extra tax the Government collected. Understandably, she did not want to tell her spouse about the payoff, so she failed to report it on their joint income return. The husband found out all about it when the IRS jumped on her for tax evasion.
A Hollywood actor got so far behind in his taxes that the Government put liens on all his property, including his race horses. When one of the horses won a $20,000 purse in California, IRS wanted to seize the money. But his lawyer persuaded the agents that if the actor used the money to ship the horse East and enter him in a $100,000 race, the Government might collect a lot more. In effect, IRS bet on the horse. It finished out of the money—and so, for the time being, did the IRS.
Roads of Avoidance. Of all the escape routes in the tax code, the one that rankles tax reformers most of all is the oil depletion allowance, which costs the Government well over a billion a year in taxes. The proprietor is permitted to deduct 27½% of the gross income from an oil property in figuring his tax—and he can keep doing that even after he has recovered his capital outlays. "It's the only law I can think of," says one Treasury source, "that allows a recovery in excess of the investment." Similar allowances apply to natural gas and, at lower rates, to most kinds of mineral deposits. Last week a federal judge in Texas ruled that farmers who draw water from wells on their own land are entitled to a depletion allowance, too.
Another wide avenue of tax avoidance is the special tax treatment of capital gains—profits on sales of assets held for six months or more are taxed at half the normal income tax rate, up to a limit of 25%. It is greatly to the advantage of high bracket taxpayers to gather in money as capital gains rather than as fully taxable income, and figuring out ways of doing that is a principal preoccupation of high fee tax lawyers. Another heavily traveled road of avoidance is the use of taxexempt foundations to reduce tax liability. A businessman can set up a foundation in such a way that it remains under his own control, make fully deductible contributions to it, but retain some use of the money he donates—he may take it back in the form of an easy-term loan, for example.