Getting Away With WRITEOFFS : When it comes to mixing business, pleasure and tax deductions, some big spenders push the limits.

Reeling from public outcry, magazine magnate Malcolm S. Forbes says he won’t try to deduct expenses of his extravagant $2-million Moroccan birthday bash last weekend.

But Forbes and many other top executives and wealthy individuals--when less hindered by the glare of media publicity--routinely deduct business or entertainment expenses that often lavishly mix pleasure with business.

Wealthy business owners such as Forbes--who are closely identified with their companies and whose assets are often intermingled with those of their companies--also routinely entertain friends and business associates in company-owned yachts, jets, resorts, estates or other properties. They or their companies often write off the costs as business expenses and generate additional writeoffs by depreciating the value of the assets.

Many of these writeoffs may be legitimate, because serious business is discussed and deals are made. But others are merely social gatherings disguised as business meetings, violating Internal Revenue Service requirements that they fulfill a necessary business purpose and are not lavish, tax experts say.

“It’s a very common problem,” says Ted Roth, partner in the Los Angeles accounting firm of Roth, Bookstein & Zaslow. “He (Forbes) was very extravagant, but others are very extravagant also.”

“The line between personal and business entertaining is a tough line to draw,” says Dick Poladian, partner at the Los Angeles office of Arthur Andersen & Co., an accounting firm. Often, he says, “a lot of proprietors do precious little business” on outings on the company yacht or jet, he says.

Entertains Regularly

The practice of co-mingling of personal and business assets to reduce taxes has been spotlighted recently in the case of Harry and Leona Helmsley. The wealthy New York hotel magnates are being tried on charges of evading taxes by fraudulently billing millions of dollars in personal expenses, primarily work on their Connecticut home but also including such items as Mrs. Helmsley’s mascara and bras, to Helmsley companies.

Malcolm Forbes has regularly entertained business associates and advertisers on a yacht, corporate jet, at a Manhattan town house, French chateau, Colorado ranch, South Pacific island and other properties owned by himself or his magazine publishing company. Both may often deduct the expenses and depreciate the value of the assets.

The 70-year-old billionaire also is believed to have created a unit of his magazine company, called the Balloon Ascension division, that might deduct costs of his hot-air balloon trips on grounds that the excursions promote and advertise the magazine.

Such tax-reduction strategies aren’t limited to celebrity millionaires. Common--but sometimes questionable--business and entertainment deductions are taken by ordinary taxpayers on virtually everything, from bar mitzvahs to athletic club dues to wedding gifts to home improvements, IRS records show. Consequently, these deductions are among the primary writeoffs the agency examines in determining whether to audit an individual’s or company’s returns, Roth says.

Many Disallowed Deductions

Cases in federal Tax Court over the years that have raised IRS ire include:

- A Philadelphia rabbi, Arnold H. Feldman, who wasn’t permitted to deduct the cost of his son’s bar mitzvah and reception attended by some business associates. The court ruled that the festivities were not directly related to Feldman’s trade or business.

- A Roanoke, Va., oral surgeon, John E. Gardner, who was denied a deduction for expenses of a cocktail party attended by some 200 doctors, dentists and their spouses. The court ruled that the event was not directly related to Gardner’s trade or business.

- Ahmed F. Habeeb, a medical professor at the University of Alabama in Birmingham, who was denied deductions for 16 of the 30 days he claimed were business related on a 45-day trip to Egypt. The court claimed that the professor was unable to prove business activities for those days.

- A Dearborn, Mich., lawyer, Charles V. Fellrath, who was denied deductions for a golf trip to Palm Springs taken with two corporate managers whom he was trying to woo as clients. The court ruled that the trip was simply a spring golf outing with old friends.

‘Ordinary, Necessary’

Many other cases that involve celebrities tend not to get publicized, in part because the rich and famous usually settle out of court to avoid the notoriety, says Sidney Kess, a New York accountant and lawyer.

The crux of these and hundreds of other cases is whether at least part of the expenses were an “ordinary and necessary” part of the taxpayer’s trade or business. If the activity was designed to promote good will only, it is not deductible, IRS rules say.

“In order to be deductible, there must be a direct relationship between the entertainment and the deriving of income,” Roth says. “It cannot be merely a social engagement. There has to be a direct expectation that income will be generated from the meeting and business issues are part of the discussion.”

In one Tax Court case, the owners of a tavern were allowed to deduct expenses of a Christmas party for neighborhood children on grounds that it helped generate advertising through publicity, IRS spokesman Robert Giannangeli says.

But a court denied deductions to a plumbing company owner for costs of landscaping and maintaining a farm where he took customers, on grounds that “the connection between the unusual display of shrubbery and an order for a pipe was too oblique,” the court ruled.

In Malcolm Forbes’ case, he or his magazine would have had to argue that the primary purpose of the Moroccan birthday bash was to generate additional advertising and good will for his magazine group, Roth says.

Dual Purpose Functions

But the presence of many of Forbes’ family members, among other things, would have raised serious questions at the IRS as to whether this was the case, Kess says. Forbes may not even be able to deduct the portions of the party expenses attributable to actual business--probably just a small fraction of the total, Arthur Andersen’s Poladian suggests.

Costs associated with weddings, birthday parties, bar mitzvahs or other “dual purpose” functions where personal activities are combined with business don’t generally fly as ordinary and necessary business expenses, Poladian says. Attempts to write off even part of these affairs, say a wedding where 20 guests are business contacts and 80 are family and friends, generally have been disallowed by the IRS or the courts, he says.

IRS also requires that expenses be considered “reasonable” and not “lavish and extravagant,” but that has been subject to interpretation.

“If the biggest sale you do with a customer is $100 and you are spending $600 on dinner, there has to be a question,” Giannangeli says. In the Forbes case, “I think a $2-million birthday party might qualify” as lavish and extravagant, he says.

The activity also must be directly related to the active conduct of the taxpayer’s trade or business, Giannangeli says. As such, a hospitality suite for clients at a business-oriented convention might qualify, but taking a client to a cocktail party attended by hundreds of non-clients might not, he says.

Another IRS requirement is sufficient record keeping. Individuals or corporations must keep detailed records of all expenses of the company yacht, as well as who attends each function and their business purposes.

And if the yacht is owned by the company, any personal use by employees would be considered income and thus taxable, just as personal use of a company car is considered taxable income, Poladian says.