Is Plastic Surgery Really Tax Deductible?

The February 2013 issue of Plastic Surgery Practice Magazine came out recently and features an article entitled "Is Plastic Surgery Really Tax Deductible".   I was interviewed for the article and provided a brief background on some of the governing rules. 

Medically Necessary Versus Elective?

In the context of cosmetic surgery, the question does not really turn on the distinction between being a medical necessity or being an elective procedure. A different test applies. Under the Internal Revenue Code (“the Code”), a partial deduction is allowed for the expenses paid by a taxpayer for “medical care.”

However, the Code explicitly excludes cosmetic surgery from falling under the definition of medical care unless the surgery is one which can generally be considered corrective. The Code defines “cosmetic surgery” as a procedure which is directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease. For a procedure to be deductible, it must be necessary to ameliorate a deformity arising from or directly related to i) a congenital abnormality, ii) personal injury, or iii) a disfiguring disease.

“Thus, when a woman undergoes breast reconstructive surgery following a mastectomy, the reconstructive surgery, although cosmetic and elective, would be a deductible medical expense. However, a breast augmentation to simply improve one’s appearance would not be deductible,” Callister explains.

In addition, Callister says that there is precedent for deducting the costs of skin removal. Thus, when a patient loses a significant amount of weight, loose-hanging excess skin can be removed and be considered deductible if the skin mass interferes with the patient’s daily life or is prone to infection and disease. Again, as with most things, the exact facts and circumstances factor into this decision.

Will the Chris Dorner $1 Million Reward Ever be Paid Out?

With the charred remains found at the Big Bear cabin being positively identified as Chris Dorner's, the question remains, what is the fate of the promised $1 million reward offered up by L.A. Mayor Antonio Villaraigosa. 

Unlike the initial $100,000 reward that was offered by the L.A. City Council that is subject to clear government code section on the offering and payment of rewards, the $1 million reward offer was more of a "private" cobbling of business and union groups that had pledged funds to satisfy the reward in the event it was ever paid out.  It is my understanding that these various groups made these pledges on different conditions.   Some groups pledged funds under the understanding that it would be applied in the same manner as city rewards, which are paid out only after "capture and conviction."  However, other groups made pledges attached with additional conditions--requiring that the funds not go to Dorner's mother, or to an accomplice. 

In short, each pledgor is under a different obligation to furnish the award funds.  Legally, it appears that there is likely no obligation for the donors to actually transfer funds.  However, politically, it would be difficult for a larger corporation to retain funds in the face of public outcry.

Time will only tell.

Pres. Obama Lectured on the 10% Biblical Tithe and the U.S. Tax System

On Thursday's National Prayer Breakfast, renowned neurosurgeon Dr. Benjamin Carson gave a 25 minute address that lambasted political correctness, proposed changes to Obamacare and urged tax reform.

One of his more interesting discussions delved into "fairness" and the U.S. tax system.

He argued:

"What about our taxation system? So complex there is no one who can possibly comply with every jot and tittle of our tax system. If I wanted to get you, I could get you on a tax issue. That doesn't make any sense. What we need to do is come up with something that is simple.
When I pick up my Bible, you know what I see? I see the fairest individual in the Universe, God, and he's given us a system. It's called tithe. Now we don't necessarily have to do it 10% but it's principle. He didn't say, if your crops fail, don't give me any tithes. He didn't say, if you have a bumper crop, give me triple tithes. So there must be something inherently fair about proportionality. You make $10 Billion dollars you put in a Billion. You make $10 you put in $1 - of course, you gotta get rid of the loopholes, but now now some people say, that's not fair because it doesn't hurt the guy who made $10 Billion dollars as much as the guy who made $10. Where does it say you have to hurt the guy. He's just put in a billion in the pot. We don't need to hurt him.
It's that kind of thinking - it's that kind of thinking that has resulted in 602 banks in the Cayman Islands."

Converting From a For-Proft to a Nonprofit Entity

Under California and Federal law, it is possible for a for-profit corporation to convert to a nonprofit entity.  This conversion really has two components: i) making the change for state law entity purposes, and ii) seeking and obtaining tax exempt status for the now, nonprofit entity.

With respect to legal conversion, there is a unique section in the California Corporation's Code which allows a corporation to convert to a California Nonprofit Public Benefit Corporation, simply by amending its articles of incorporation. (See Cal. Corp. Code Sec. 911.)  Oddly, this provision is not grouped with all the other provisions that deal with corporate conversions but is part of the section of the code that deals with amending articles.  This distinction means that there is no "converting" or "converted" entity or "terminated" and "surviving" entity as is the case under the normal statutory conversion sections.  In essence, a conversion under Sec. 911 means the entity is the same entity as before--it is just a classified differently.

Of course, amending the articles appropriately is only part of the process--the entity must still apply for tax-exempt status at both the state and federal level.  This is done by filling out  IRS form 1023.  Note that if you have converted from a for-profit to a nonprofit, there is a separate Schedule G to the form 1023 that must be filled out where you are to explain why the conversion occurred and what relationships various parties have to the entity.  The biggest question is why would an entity that is making money, apparently for commercial reasons, want to switch to non-profit status?  The IRS will want to ensure that there is no self-dealing or private inurement to certain owners and officers as a result of the conversion.  Assuming the IRS grants tax-exempt status, the entity can easily seek tax exempt status at the state level. 

Curiously, one grey area is whether or not the entity must acquire a new EIN for tax reporting purposes.  The guidance provided by the IRS on this matter is unclear and subject to varying interpretations.  Typically, most entities prefer to retain their own EIN so there is less administrative burden. 

On final aspect are the tax implications that are involved.  In particular, most C corporations prefer to bonus out employees at the end of the year so that there is minimal corporate income (in an effort to minimize corporate level taxes).When a conversion is made, consideration should be given as to the timing of corporate income and expenses so that as much of the corporate expenses are allocated to the time frame when the corporation is a nonprofit. 

Obama Warns of Increasing Taxes...Again

For those who thought that federal tax increases had been settled...think again.

In a statement issued Tuesday morning, President Obama proposed delaying sequestration to craft a compromised budget that would have a mix of some spending cuts and additional tax revenue. Specifically, the President stated that he would be willing to cut spending on social programs so long as they are done “hand-in-hand with a process of tax reform so that the wealthiest individuals and corporations can’t take advantage of loopholes and deductions that aren’t available to most Americans.”

No additional details were provided by the President--which leaves one to wonder what type of "loopholes" might be at risk.  Forbes has reviewed the President's prior unfulfilled tax proposals for the most likely "loopholes" to be changed:

Elimination of “Last in first out” accounting. Under the “last-in, first-out” (LIFO) method of accounting for inventories, it is assumed that the cost of the items of inventory that are sold is equal to the cost of the items of inventory that were most recently purchased or produced. This allows some businesses to artificially lower their tax liability.
Elimination of oil and gas tax preferences. The president’s proposal for corporate tax reform takes aim squarely at the oil and gas industry. This change would repeal the expensing of intangible drilling costs as well as percentage depletion for oil and natural gas wells.
Taxing carried (profits) interests as ordinary income. Currently, in exchange for managing the investments of a private equity fund, fund managers are able to receive allocations of income that are taxed at preferential rates as long-term capital gain and qualified dividends. President Obama has long taken issue with this treatment, and has proposed eliminating the loophole for managers in investment services partnerships and taxing carried interest at ordinary income rates.
Eliminate special depreciation rules for corporate purchases of aircraft. This would eliminate the special depreciation rules that allow owners of non-commercial aircraft to depreciate their aircraft more quickly (over five years) than commercial aircraft (seven years).
Require companies to pay a minimum tax on overseas profits. Income earned by subsidiaries of U.S. corporations operating abroad would be subject to a minimum rate of tax. Thus, foreign income deferred in a low-tax jurisdiction would be subject to immediate U.S. taxation up to the minimum tax rate with a foreign tax credit allowed for income taxes on that income paid to the host country.
Remove tax deductions for moving productions overseas and provide new incentives for bringing production back to the United States. Companies would no longer be allowed to claim tax deductions for moving their operations abroad. At the same time, to help bring jobs home, the President would give a 20 percent income tax credit for the expenses of moving operations back into the United States.

What We Can Learn From the 100th Anniversary of the Federal Income Tax

Just a few days ago marked the 100th anniversary of the ratification of the 16th Amendment, which enabled the establishment of the U.S. federal income tax.

The 16th Amendment has a fascinating political history and the fact that there was popular support for the self-imposition of additional taxes was somewhat unique.  However, the 16th Amendment was never intentioned to be the federal government's main source of revenues.  Indeed, when it was being promoted, it was marketed as "just 1% on the top 1%"--meaning that only the top 1% of earners would be subject to the tax, which rates began at just 1%.  After all, who could be against such a tax? As the House of Representatives Committee Report indicated "all good citizens, it is therefore believed, will willingly and cheerfully support and sustain this, the fairest and cheapest of all taxes".

Over the years, the rates went up and up and the percentage of those actually subject to the income tax increased as well.  What was envisioned as a "soak the rich" tax, ultimately "soaked" the middle class as well. 

California Out of Funds to Disarm 19,700 Felons and Mentally Ill People

I was surprised to find out that California already has laws in place that enable it to confiscate weapons from the mentally ill in addition to convicted felons.  Unfortunately, the State does not apparently have the funds to actually go out and seize the weapons.

From the LA Times:

SACRAMENTO — California authorities are empowered to seize weapons owned by convicted felons and people with mental illness, but staff shortages and funding cuts have left a backlog of more than 19,700 people to disarm, a law enforcement official said Tuesday.

Those gun owners have roughly 39,000 firearms, said Stephen Lindley, chief of the Bureau of Firearms for the state Department of Justice, testifying at a joint legislative hearing. His office lacks enough staff to confiscate all the weapons, which are recorded in the state's Armed Prohibited Persons database, he said.

The gun owners typically acquired the firearms legally, before being convicted of a felony or diagnosed with mental illness. Each year, the state investigates and seizes the guns of about 2,000 people on the Armed Prohibited Persons list, Lindley said, but each year about 3,000 names are added to the list.

"Despite our best efforts, the bureau does not have the funding or resources to keep up with this annual influx," he told the 15 assembled lawmakers.