Thank William Halby for providing the answer to a question un-told numbers of taxpayers may have pondered but dared not act upon: 

“I wonder if there’s a way I can deduct my Hustler subscription?”

In fact, Halby was substantially more ambitious than that.  He not only deducted the cost of pornographic materials, he also wrote off sex textbooks. Oh, and just to really push the envelope, he deducted the money he spent on prostitutes.

In case you’re wondering, Halby didn’t try to justify any of these as a “business” expense.  Instead, he deducted them on the basis that they were medicalexpenses.

You could hardly find a better-qualified individual to test the system. After all, Halby was an attorney with 40 years of experience.  Better yet, his specialty was tax law.

Importantly, Halby didn’t try to hide anything.  According to documents issued by the Tax Court(1), he dutifully listed $76,314 of “medical” expenses on the Schedule A (“Itemized Deductions”) attached to his 2004 tax return.  This broke down into: “(1) $2,368 for medical books, magazines, videos, and pornographic material; (2) $65,934 for prostitutes; and (3) $5,632 in bank and finance charges incurred in connection with loans used to pay for the claimed medical expenses.”

The Schedule A attached to his 2005 return included $49,203 in similar “medical” deductions.

Section 213 of the Internal Revenue Code allows you to deduct medical and dental expenses that are not covered by insurance if they exceed 7.5% of your adjusted gross income (AGI).  In addition, it defines “medical care” as money spent “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.”

Furthermore, if requested by the Internal Revenue Service, “the taxpayer must… furnish a statement or itemized invoice identifying the patient, the type of service rendered, and the specific purpose of the expense.”  The Tax Court acknowledged that, Halby’s tax returns included attachments that “provided further detail on the costs” he was claiming as medical expenses. However, the court described these as “only vague descriptions,” noting that “the actual receipts were not entered into evidence.” 

Representing himself in court, Halby admitted that none of his medical expenses had been ordered by a doctor. Undeterred, he entered into evidence a number of books and articles to support his argument about the “positive health effects of sex therapy.”  

The Tax Court wasn’t persuaded.  It pointed out that Section 213 of the Tax Code- which, in his four decades as a tax lawyer, Halby was surely aware of- specifically prohibits medical deductions for “illegal operations or treatments.”  And, in case anyone is wondering, prostitution is still illegal in the state of New York, where Halby lived and practiced.  And received his “therapy.”

Saying, essentially, that someone with Halby’s background should have known better than to try this kind of a stunt, the Tax Court not only disallowed his “medical” deductions, it smacked him with back taxes and penalties amounting to $25,789.

Now you know why IRS agents have a reputation for being grouchy.  Just think about who they deal with on a daily basis.

1. U.S. Tax Court, Dkt. No. 14785-07, TC Memo. 2009-204, September 14, 2009.

Ms. Buckner is a Retirement and Financial Planning Specialist at Franklin Templeton Investments. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content. 

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