Ah, Lindsay Lohan. Always good for water cooler conversation. According to the gossip site TMZ, Lindsay is facing legal woes again. This time, she allegedly stiffed a limo company, Elite Transportation Limo and Security Services, for services from February 2009 to May 2009. The tally? A whopping $90,585.79.
It’s the kind of thing that makes people talk. And since I’m a tax attorney, these conversations inevitably turn to tax. So when a friend asked me if it was deductible, I wasn’t all that shocked. After thinking for a second, I replied that probably was… after all, the limos were reportedly used for travel to airports, hotels, drug rehab (which we already know is deductible) and media appearances – security was also said to have been provided by the limo company on these occasions. So the base cost of the limo bill is likely deductible.
But what about the lawsuit from the limo company? And what about those other lawsuits? The drug charges? The E*Trade “milk-a-holic” suit? The infamous necklace theft case? Deductible?
It’s clear that you can’t deduct any resulting fines, fees or penalties paid to the government for breaking the law. The support for that position is found at section 162(f) of the IRC which says:
No deduction shall be allowed… for any fine or similar penalty paid to a government for the violation of any law.
So, tickets for DUI, drug offenses, that sort of thing… not deductible. But what about those legal costs?
Legal services are generally not deductible to individual taxpayers: legal fees which are personal in nature are never deductible. However, you can deduct the cost of legal services related to producing or collecting taxable income. These expenses are deductible on Schedule A as miscellaneous itemized deductions subject to the 2% limitation – a pretty high bar for a top earning taxpayer .
But I’m guessing that Lindsay doesn’t report all of her income and expenses as a regular taxpayer. I’m guessing that she files as a business taxpayer. She is, after all, a marketable commodity and likely has more than one company associated with her brand.
If you are a business taxpayer, you can deduct any legal expenses on your return that could be considered business expenses. To be considered a bona fide business expense under 26 USC Sec 162(a), the expense must be “ordinary and necessary… in carrying on any trade or business.”
So the bigger question becomes, What exactly is the business of being Lindsay? In other words, when is defending Lindsay’s behavior (or in the case of E*Trade, defending her name) a personal endeavor versus a business one?
If you flash back to Lindsay’s Parent Trap and Mean Girls days, I would argue that the business of being Lindsay hinged largely on her good girl image. Protecting that image was, at one time, of primary importance. I would think, then, that any actions to protect her image – from defending charges to pursuing suits to protect her reputation – could (note that I said could, not would) be considered expenses relating to the business of being Lindsay.
But now, I don’t think you can say that Lindsay relies on her good girl image for business. In fact, it could be argued that it’s quite the opposite. A quick poll on Facebook supported that idea: nearly 80% of the respondents identified Lindsay in a negative light. So, does the analysis still hold? Is the business of being Lindsay – even as a bad girl – still a considered a business for purposes of business expense deductions?
To qualify, expenses relating to the business of being Lindsay would have to meet the “ordinary” and “necessary” criteria. An ordinary expense is one that is “common and accepted in your trade or business.” In the most generic use of the term, legal expenses are certainly common and accepted for celebrities. But if you look at specific behavior, would legal defense fees for criminal activity be considered common and accepted for celebrities? Does it depend on who you ask?
Assuming that you could argue that case, it brings us to the second question: are the expenses necessary? A necessary expense is one that is “helpful and appropriate for your trade or business.” On some level, of course the expenses were necessary – it’s generally considered foolish to represent yourself in court, especially on criminal matters. But are they helpful and appropriate for Lindsay’s trade or business? I think that might depend on what business you’re describing.
These matters are so fact and circumstances dependent that it’s impossible to give a thorough answer without knowing more information. But it does make for fun cocktail party conversation, especially among the tax geek set (just as it did with respect to Belichick’s cheating scandal).
As with other actors, celebutantes and sports figures before her, it’s an interesting question from a tax policy standpoint. Assuming that Lindsay is allowed to claim the deduction for all of her legal expenses — and that’s a big assumption — is it good policy? If so, does that mean that the business of being Lindsay more important than the business of being, say, you or me? Where is that line exactly?
