How much would you pay to have your child take care of you when you’re
old and infirm? What if your child gave up practicing as a lawyer–a
tax lawyer no less–to care for you? Perhaps plenty, but probably
not $1.2 million. That’s one lesson from Estate of Olivo v. Commissioner.
The court considered whether mom’s estate could deduct $1,240,000
for son’s services before mom died. Tax lawyer Anthony Olivo worked
in law firms from 1976 to 1988, then opened his own practice. Yet by 1994,
he was devoting so much time to his parents and their health problems
that it was hard to maintain his practice. He lived with his parents and
gave them round-the-clock care. That left little time to practice law,
so from 1994 through 2003, he earned almost nothing from his practice.
So when they died he figured the estate should pay him all those lost
wages. Hey, it’s deductible, he said. The court had to decide whether
the estate could deduct the $1,240,000. On top of that was the $44,200
administrator’s commission Anthony received, not to mention $55,000
in accountant’s and attorney’s fees. The court was careful
to say that Anthony rendered extraordinary care. Hey, this was a doting
son. His efforts were commendable. However, mom’s estate couldn’t
prove that Anthony was entitled to any pay or how much his services were
worth. There was no contract, no invoice, and no evidence the family agreed
to pay him anything. Sure, Anthony gave round-the-clock care. The family
would have hired round-the-clock nurses if he hadn’t been there.
But he was, and the fact that a nurse would have been paid didn’t
mean pay to Anthony was deductible. Anthony even considered billing the
estate for his legal services. After all, apart from his personal care
and for administering the estate, he performed legal work too. He filed
the estate tax return, handled an IRS audit and the estate’s Tax
Court petition. But here again, Anthony was out of luck. He didn’t
keep time records, prepare invoices, or establish the value of what he
did. He merely estimated his hours at a $150 hourly rate. That kind of
loosey-goosey estimate wasn’t enough for a deduction. The biggest
lesson? Contracts, invoices, and good record-keeping are as important
with family or related parties as anywhere else. In fact, perhaps there’s
a bigger reason for being scrupulous with family and related parties:
to save yourself headaches with the IRS. Happy Mother’s Day, Mom.
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