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The deductibility of charitable contributions has led to a colorful abuse: buying a painting, having it appraised later on at a much higher value, then donating it to charity and claiming a deduction at the full inflated figure. The IRS is currently battling the claim of an art patron who seems to have refined this device even further—by painting her own deductions. The revenuers claim that she was deducting up to $30,000 a year for contributing her own nonobjective paintings to art museums. The principal evidence of the market value of the paintings is that one was sold—to a business partner of her tax lawyer.
Helping Righteousness. Despite the tax code's complexities and invitations to cheat, Commissioner Caplin thinks the U.S. taxpayer behaves remarkably well by world standards. "No other country in the world," he says, "can approach the percentage of citizens who pay taxes promptly, report all their income, and take only the allowable deductions." But Caplin is not a man to sit back and hope that righteousness will prevail unassisted by enforcement. He has warned taxpayers that the IRS would crack down, for example, on the art-donation loophole. And he has intensified IRS scrutiny of returns submitted by high income taxpayers. "We might not examine one out of 100—one out of 1,000—of the 1040-A returns," he explains. "They are wage earners and take standard deduction, and we get income information from their employers. But we would examine nine out of ten returns in the $100,000 bracket, and we would really zero in on returns that claim travel and entertainment expense."
Caplin has plenty of justification for looking hard at those "T. & E." deductions. "It is impossible to delineate accurately between business and nonbusiness expenses," he says, "and each decision must necessarily be arbitrary to some extent. But experience discloses widespread abuse of the tax law in this area—abuse which strikes at the heart of our self-assessment tax system." Samples:
¶ The president of Sanitary Farms Dairy, Erie, Pa., and his wife took a six-month African safari in 1950, with stops in Paris, London and Rome. The Tax Court permitted the firm to deduct $16,443 for costs of the trip on the ground that it constituted legitimate "advertising."
¶ Wisconsin's Doughboy Industries paid out $10,000 to remodel the ground floor of a top executive's home and $6,000 to construct a swimming pool on the grounds. A lenient court ruled that the company could deduct 95% of the outlays because the executive often entertained customers at home.
¶ A tax consultant claimed a deduction on the expenses of operating his yacht, explained that he ran up a pennant with the number 1040 on it every time his yacht reached port, thereby advertising the fact he was open for income tax business. (IRS disagreed.)