Section
1031 and the O.J. TrialWhile the O.J. Simpson trial may have captured the attention of the American public for 9 months, one of the more intriguing aspects of the case went unnoticed. It seemed that O.J. was using the threat of reporting a "busted" IRC Sec. 1031 tax-free exchange transaction to the IRS as leverage with Nicole Brown Simpson. Perhaps O.J. had been reading the Tax Prophet's extensive discussions regarding tax-free exchanges. Generally, IRC Sec. 1031 provides that if property which is held for investment is exchange for "like-kind" property which is held as an investment, no gain or loss will occur on the transaction. However, an exchange of investment property for personal property, such as a residence, violates IRC Sec. 1031.
Evidently Nicole had sold a rental property in San Francisco and invested the proceeds from the sale in the famous Bundy house. To comply with IRC Sec. 1031, she was required to treat the Bundy house as a rental. By using the Bundy house as her residence, the sale of the San Francisco property would be fully taxable. Apparently, Nicole reported the transaction as a tax-free exchange, not as a sale, and she used O.J.'s house at Rockingham as her residence for tax purposes. When her attempt to reconciliate with O.J. failed, he threatened to report her to the IRS for lying about where she was living. O.J. wrote a letter to Nicole stating that she could not use Rockingham as her residence that he would have no part of her actions that could be misleading to the IRS. This letter was introduced into evidence at the trial.
So who says tax law is boring or irrelevant? For more information on structuring tax-free exchanges see: Deferred Like-Kind Exchanges Under Section 1031 (a)(3) After Starker
Are
the Dream Team's Legal Fees Deductible?Bad news for O.J. on this front: While the Dream Team got him off, his legal fees will not be deductible on his California income tax return. The California State Board of Equalization in Appeal of Salvatore J. Marino ruled that a taxpayer could not deduct legal fees associated with a murder trial defense. The murder charge did not arise in connection with the taxpayer's profit-seeking activities; therefore, the associated legal fees were not an ordinary and necessary business expense that could be deducted.
The Marino case raises some interesting questions: What if the defendant was a professional "hit-man?" Would the fees then become a legitimate business expense? What if the murder was committed against a crooked business partner? Could a defendant then argue the legal fees were incurred in connection with a profit-seeking activity?
IRS
Eases the Substantiation Rules for Business CostsFinally there is some good news for taxpayers who do not always keep receipts for business expenses. The amount that must be substantiated by business receipts has increased from $25 to $75, beginning October 1, 1995. The IRS said that the change is designed to ease the record-keeping burden for businesses and employees. Possibly, the recent Congressional attacks on the Service may have prompted it into making this long overdue change.
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