FBI investigation

[jimenright]

My client traveled out-of-state to an interview with the FBI concerning an entity he invested in. He is trying to recover funds he invested. The entity he invested in is currently undergoing bankruptcy proceedings. I don't know what the focus of the investigation is.

Are his travel expenses deductible? What do you think?

I feel that since he is trying to recover taxable funds and the investigation is related, the expenses are deductible.

[ChEAr$]

My client traveled out-of-state to an interview with the FBI concerning an entity he invested in. He is trying to recover funds he invested. The entity he invested in is currently undergoing bankruptcy proceedings. I don't know what the focus of the investigation is.

Are his travel expenses deductible? What do you think?

I feel that since he is trying to recover taxable funds and the investigation is related, the expenses are deductible.

No.

Here's why. If FBI wanted to interview him pursuant to it's investigation, it would have come to him. His traveling to the FBI avails him nothing. Think privacy laws. FBI won't tell him the time of day. It will listen to him and take a statement, but how will this statement help him recover any funds? I doubt it.

[Koss]

Travel Expense

I think ChEAr$ is asking a good question. I'd put it a different way. Why didn't he go to his local FBI office?

That's a valid question, and maybe you should just ask the client. But I wouldn't draw any conclusions as to whether the travel is deductible until you get more information.

Just to be clear: I actually agree with the point ChEAr$ is making. If the FBI really wanted to interview him, you would think that either they would come to him, or they would pay for his travel expense. But I'm not convinced that this makes the trip nondeductible. I think you need more information.

Did the client choose to travel in order to meet with the FBI agents who are working on the case? Was there another option? Did your client even ask if the government could reimburse him?

This may sound really naive, but it is possible that an FBI agent asked him, "Can you come down here for an interview?" And your client said yes, and then paid for his own travel. In the early stages of an investigation, when it's not clear whether there has been any criminal conduct, the FBI may not proactively offer to pay for witness travel; you might have to ask.

But I'd like to argue the point on a theoretical level. Suppose I live in Chicago, and I have some rental property in Indianapolis. I hire a property manager to take care of it for me. But instead of hiring a real estate professional, I hire my brother's girlfriend's cousin's best friend, who once took a real estate course at the local community college.

Everything goes just fine for a year or two, and then strange things start happening. The rent money comes later and later each month, and the amount gets smaller and smaller, and my "property manager" can't coherently explain all of the "expenses," or produce receipts for all the "repairs and maintenance." Finally, she stops returning my calls altogether.

So I drive down to Indianapolis, and check into a motel for a couple days, to track the girl down, talk to the tenants in the apartment building, and find out what the **** is going on.

What if I discover that of the six units, only two are occupied, and the girl has simply up and left town? And then I meet with a police detective, and possibly someone from the local prosecutor's office, to explore the possibility that my "property manager" was actually stealing the rent money?

That sounds a lot like an interview in a criminal investigation. And I didn't even know it was going to take place when I decided to make the trip. I think the trip would be deductible even I never go to the police...

If you take a trip to investigate suspected fraud or misconduct associated with investment property (whether it is real property or personal property), I think that is arguably a business trip, that has a business purpose.

Two points:

(1) In the original post, I have to come back to the question of why the client traveled. Did he travel to the city where the investment was located, i.e., to the principal offices of the company which took his money? That's what makes it arguably deductible.

(2) In my detailed, imaginative example, I would argue that the entire cost of the trip is deductible right on Schedule E. But that's because it's rental real estate. If it's some other type of investment, the travel associated with it is probably only deductible on Schedule A, as an investment expense, subject to the 2% limitation.

I guess the core of my argument is that if the travel has a valid business purpose, and it is tied directly to the investment, then it is deductible in the same way that you can deduct the cost of travel to investment seminars, or subscriptions to investment-related publications. It is well-settled that these expenses are deductible. As noted in the original post, they are expenses that are attributable directly to the production of taxable income.

Here's a citation from IRS Publication 550:

Expenses of Producing Income

You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). To be deductible, these expenses must be ordinary and necessary expenses paid or incurred:

To produce or collect income, or

To manage property held for producing income.

The expenses must be directly related to the income or income-producing property, and the income must be taxable to you.

The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income.

I do think you need to ask a few questions. If the guy lives in New York, but made the investment in Chicago, six months ago, while he was visiting his sister, and now he decided to go back to Chicago, and met with an FBI agent for about 20 minutes, but spent a week in Chicago visiting his sister again, then most of the expenses are not going to be deductible.

BMK

[Koss]

Bankruptcy

The original post says that the entity in which the client invested money is in bankruptcy proceedings.

The investor is a creditor.

If the investor traveled to the city where the bankruptcy proceeding is taking place, in order to personally appear at the first meeting of creditors, then that's also a deductible investment expense.

BMK

[Koss]

Investment Expense

Hmmm...

I am not backtracking on my loquacious argument on this point. I think the travel described in the original post may well be an expense that is directly tied to the production of taxable income on an investment. This question turns heavily on the individual facts and circumstances.

But I discovered that IRS Publication 529 says that you cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. It also says you cannot deduct transportation expenses and other expenses incurred in attending a stockholders' meeting.

But Pub. 529 also goes into great detail in making a distinction between personal legal expenses and accounting fees, and those associated with the production of taxable income.

Some of this stuff hasn't been updated in many years. This is the same publication that says you can't deduct the cost of "the first telephone line to your residence," which generated a very lengthy, and very interesting discussion about whether the "first line" can be a cell phone (which would allow the second line to be a landline for business use).

This publication also says:

You cannot deduct expenses of radio and TV appearances to increase your personal prestige or establish your professional reputation.

Excuse me...

But wouldn't that qualify as an advertising expense in most cases?



The part about investment seminars and stockholders' meetings makes the IRS position pretty clear.

But as I noted in an earlier rant about the Tuition and Fees Deduction, IRS Publications are not the law. Some of this stuff is a little ridiculous.

If I pay to get on the radio or on TV, and it is associated with a business activity, I'm not getting on TV to "increase my personal prestige" or to "establish my professional reputation." I'm getting on TV in order to disseminate information about my products and services to potential clients. That's advertising, and I think it's a business expense.

BMK

[jimenright]

Thanks Koss & ChEAr$

for your knowledgeable, thought provoking comments. I am leaning toward advising my client to take the deduction, but I will ask more questions.