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Courts Rule on Home Office Deduction & Fifth Amendment

Today we examine two interesting court decisions that have implications for tax litigation.

Earlier this month, a U.S. Tax Court decided a case that involved taxpayers who had claimed a tax deduction based on the use of part of their home as a place of business.

The court found that the claim was not merited to the extent it was made by the couple. The decision said that it was highly unlikely that the taxpayers did not use much of the house for their own personal lives. It seemed implausible to the court that the family lived in only a few bedrooms and the kitchen, and never "lived" in the parts of the house claimed as business premises.

Normal household activities took place in the den, vestibule, adjoining bar, and the dining room, the court said, so a Schedule C deduction could not be taken in connection with these areas of the house.

Source: U.S. Tax Court "Rayden v. Commissioner" 1/3/2011

The other decision was on a Fifth Amendment issue. A bankruptcy trustee had moved to have a bankruptcy court compel the debtor to produce some financial documents.

The court ruled that the debtor was not required to produce personal financial documents when the debtor had raised a Fifth Amendment defense against self-incrimination.

The court decided that if the debtor were compelled to produce the financial documents he would be admitting the existence of the documents, he would be admitting that the documents were his, and admitting that the documents were in his possession and control.

The debtor established that producing the documents would incriminate him and that his production of the documents would authenticate them. For these reasons the court accepted the claim of a Fifth Amendment privilege by the debtor.

Source: U.S. Bankruptcy Court "In Re Sambrano" 12/23/2010

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