I get asked occasionally if a client can take the value of their time as a deduction. They’ve done the repairs on a rental house themselves and they want to deduct what they would have paid someone else to do it or they have worked for a charity and would like to use their time as a charitable deduction. Of course, the value of one’s time is not deductible. That doesn’t mean that taxpayers don’t try to take a deduction for their time and experience.
A husband and wife real estate professionals hired a tax preparer that set up three LLCs for them and prepared the returns for the LLCs and their couple’s personal returns. He told them that each LLC could amortize the value of the husband contribution to them. He had them set a value based on the husband’s life, time and experience in real estate. The preparer then amortized the value, $1.75 million, over 15 years for each LLC.
Needless to say the IRS didn’t agree with the deduction and disallowed it. On top of that, they added an accuracy related penalty. The taxpayers fought the penalty on the grounds they relied on the preparer for guidance. For that argument to work, the tax pro needed to have the experience to be relied upon, the taxpayers had to have given him/her accurate information and they have to rely in good faith on the tax pro.
The problem is this tax pro was not someone anyone should have relied upon. He was embezzling funds from the taxpayers, calling himself an Enrolled Agent when he wasn’t and ended up in jail and barred from preparing tax returns. It also seems that the taxpayers put their trust in him because he looked successful with a busy office. However, even if their tax preparer was someone to rely on for tax information, the taxpayers set the value of the husband’s experience to be amortized, not the tax pro. They were also a little concerned about the deduction but took it when the preparer showed them court cases that were supposed to back the deduction (but they didn’t take notes or get copies). So, the Tax Court allowed the penalty because the taxpayer didn’t check out the preparer, they set the amount to be amortized and they couldn’t show the court cases that were supposed to authorize the deduction. (TC Memo 2013-4)
They are two lessons from this case. You can’t take an amortization deduction for the value of your life (or time). If you try, you need to be prepared to get hit with an accuracy penalty. Secondly, you can’t blame the preparer for your problem unless you’ve checked them out and are sure they are someone on whom you can rely. Basically, taxpayers need to use a little common sense and make sure they understand what is happening on their tax returns. When a questionable position is taken, get copies of all the documentations the preparer uses to defend the position. Bottom line, if you sign the return, you’re responsible for what is on that return.McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax