Porn, Hookers, and Section 213 of the Internal Revenue Code

To: Holy Prepuce! Readers
From: Holy Prepuce
Re: Deductibility of Your Prostitution and Pornography Expenses Under Section 213 of the Internal Revenue Code

Question Presented

You have asked me to advise you as to whether your prostitution and pornography expenditures can be claimed as medical expense deductions pursuant to Section 213 of the Internal Revenue Code, assuming they exceed 7.5% of your adjusted gross incomes.

Brief Answer

No. The United States Tax Court views such expenditures as "personal expenses not intended to treat any medical condition." Furthermore, IRS regulations prohibit deduction of fees for "illegal operations or treatment." Claiming such deductions may also result in assessment of an accuracy-related penalty.

Analysis

A recent decision of the United States Tax Court, Halby v. Commissioner, T.C. Mem. 2009-204 (Sept. 14, 2009), is squarely on point. The facts, as recounted in the opinion, are as follows:

Petitioner [William G. Halby] is a lawyer admitted to practice in New York State. Petitioner resided in New York at the time he filed his petition.

During 2004 and 2005 petitioner frequented prostitutes in New York. Petitioner did not visit these prostitutes as part of a course of therapy prescribed by his doctor, nor did petitioner ask his doctor to prescribe any sort of sex therapy. Petitioner kept track of these visits in a journal. The journal included the date, the name of the “service provider,” and the amount. Petitioner did not discuss these visits with his doctors afterwards to determine their impact on his health.

During 2004 and 2005 petitioner purchased pornography and books and magazines on sex therapy. Petitioner also recorded the dates and amounts of the purchases in his journal.

The IRS subsequently disallowed certain medical expense deductions claimed on Halby's 2004 and 2005 income tax returns:

The $73,934 disallowed by respondent [IRS] for 2004 included:(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 $47,024 disallowed for 2005 included: (1) $5,005 for books, magazines, videos, and pornographic materials; and (2) $42,152 for prostitutes.

Halby filed a petition in the Tax Court, challenging the IRS's determinations.

The IRS argued that Halby was "not entitled to deduct amounts paid to prostitutes because such payments were illegal and petitioner has not provided substantiation as required by section 1.213-1(h), Income Tax Regs." Section 1.213-1(h) requires that taxpayers substantiate medical expense deductions by listing for each expense the payee name, payee address, date, and amount. Upon IRS request, the taxpayer must also produce an itemized invoice, identifying the patient, type of service rendered, and specific purpose thereof.

The IRS further argued that Halby was "not entitled to a deduction for amounts paid for books on sex therapy and pornographic material because those amounts were incurred for petitioner’s general welfare."

Halby "d[id] not argue that section 213 and the regulations thereunder allow a deduction for these costs." Rather, he

point[ed] to book and magazine articles about the positive health effects of sex therapy and argue[d] that [the court] should allow him a deduction despite the illegality of his conduct or the fact that petitioner’s doctor did not prescribe this treatment.

At the outset of its holding, the Tax Court noted that "[t]ax deductions are a matter of legislative grace, and a taxpayer has the burden of proving that he is entitled to the deductions claimed." Finding that Halby had not met this burden, the Tax Court ruled in favor of the IRS, reasoning as follows:

Section 1.213-1(e)(1)(ii), Income Tax Regs., provides that a taxpayer is not entitled to a deduction for any illegal operation or treatment. Petitioner’s payments to various prostitutes were personal expenses not prescribed by a doctor and not intended to treat a medical condition. Petitioner is not entitled to deductions for these amounts.

Petitioner is likewise not entitled to deductions for amounts paid for books and magazines on sex therapy and pornography. The purchases were not for the treatment of a medical condition but were instead personal items. Sec. 1.213-1(e)(1)(ii), Income Tax Regs.

The Tax Court further ruled that Halby was liable for an accuracy-related penalty, because he

did not have reasonable cause or a reasonable basis for claiming the deductions at issue. Petitioner has been an attorney for 40 years and specialized in tax law. Petitioner should have known that his visits to prostitutes in New York were illegal and that section 213, the regulations thereunder, and caselaw do not support his claimed deductions.

Halby has since told Forbes Magazine that he plans to appeal, "focusing on what he said was an argument he made in legal briefs but which the judges didn't discuss: The U.S. Constitution contains a right of privacy that protects consensual sex whether paid or not." He also told Forbes that the "pornographic materials . . . now fill[] 'shelf after shelf in my apartment.'"

Conclusion

Readers, your proposed course of conduct is unsupported by the Internal Revenue Code or IRS regulations. Although I understand that your prostitution and pornography expenses this year are likely to be considerable, I strongly advise that you do not claim them as deductions on your 2009 individual income tax returns.

Please let me know if I can be of further assistance on this matter.

H.P.