Accountant Tries to Deduct Value of His Own Services

Accountant Tries to Deduct Value of His Own Services

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Are you sure we don’t need to regulate unenrolled tax preparers?

Here’s the story of an accountant named Mondello who tried, with a straight face, to  take a deduction on his income tax return for the value of his services (Mondello v. Commissioner, T.C. Summ. Op. 2011-97 (July 25, 2011)):

Petitioner operated his Web site business using the accrual method of accounting. In 2007 petitioner worked 1,000 hours developing the Web site. Petitioner charges unrelated parties between $45 and $55 an hour for performing work similar to that which he performed on his Web site development.

Petitioner’s proprietorship, the Web site, did not pay him for any services he performed for himself. Petitioner’s proprietorship accrued $50,000 as a liability for payment to petitioner for his work to set up his Web site, and the accrued expense was deducted on Schedule C of the return. …

From an accounting standpoint, the time petitioner spent on his own Web site instead of earning $45 to $55 an hour from unrelated parties is an opportunity cost, an imputed expense to petitioner and his business. It is not an incurred expense, is not reflected in the financial statements, and is not an actual cost. ….

Respondent cited several cases for petitioners’ and the Court’s consideration on this issue. In Maniscalco v. Commissioner, T.C. Memo. 1978-274, the Court observed that “Whatever may be said in behalf of taking into account the value of one’s own services in lieu of paid labor, such services are not considered an element of the deduction under sec.162(a). …

Petitioner argues that all these cases involve cash basis taxpayers, and he agrees that a cash basis taxpayer cannot deduct a payment to himself in the same year. However, he argues inexplicably that because his business was on the accrual method the cases respondent cites not only are inapposite but also support his position.

Neither accounting principles, tax law, nor common sense supports a deduction by petitioners for contract labor as a result of an accrual of an amount “owed” by petitioner to himself for his own labor.

This is accounting 101 and Mr. Mondello failed it miserably.

The Tax Court sustained the IRS’s assessment of the substantial understatement and accuracy related penalties, but in my opinion, the maroon should have also been hit with a frivolous return penalty.

He wasted the taxpayers’ money by pursuing this ridiculous claim.

About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida

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