Taxing Times - Purr-fect Tax Deduction: How Cat Food Helped a Junkyard Business

This episode is for cat enthusiasts!
Today we’re going to follow the story of a couple in the 1970s who owned a junkyard and managed to deduct the cost of cat food from their taxable income. 
What ensued was a battle with the IRS and some very well fed cats. 

Transcript

Hello and welcome to Taxing Times, the podcast that explores the fascinating, controversial and often wacky history of taxation. I'm your host, Nupur Kumar, aka Super Nupur, a major tax and history nerd, and a managing partner of Fact Professional, a full-service CPA firm. Today we're going to talk about how a couple who owned a junkyard managed to deduct the cost of cat food from their taxable income.

The story begins in the late 1970s, when Samuel and Nancy Seawright ran a junkyard in South Carolina. They had a problem with snakes and rats infesting their property, which posed a danger to their customers and themselves. To solve this problem, they had the brilliant idea to attract wild cats to their junkyard by putting out cat food every day. The cats did more than just eat.

They also hunted and scared away the snakes and rats, making the place safer and more sanitary. The sea rights claimed the cost of the cat food as a business expense on their tax returns, arguing that it was an ordinary and necessary expense for their junkyard business. The IRS, however, disagreed and disallowed the deduction, saying that the cat food was a personal expense and not related to the business.

Searights appealed the IRS decision to the tax court where they had to prove that the cat food was indeed a business expense. So, do you think the Seawrights won or lost when they appealed to the tax court? The tax court sided with the Seawrights, they won. And they allowed them to write off the cost of the cat food.

because the court found that the cat food was an ordinary expense because it was common and accepted in the junkyard industry to use cats as pest control. The court also found that the cat food was a necessary expense because it was appropriate and helpful for the sea rights business. The court noted that the sea rights did not own the cats, nor did they provide them with any shelter or veterinary care. They simply fed them to keep them around the junkyard.

The court concluded that the cat food was a legitimate expense and not a personal or charitable expense. I like to think of it as paying wages to their cat employees as compensation for a job well done. Now let's take a closer look at the legal reasoning behind the court's decision. The tax court applied the so-called ordinary and necessary test, which is the basic standard for determining whether a business expense is deductible.

according to the Internal Revenue Code. A business expense is deductible if it is both ordinary and necessary for carrying on the trade or business of the taxpayer. The court defined ordinary as meaning common and accepted in the particular industry, and necessary as meaning appropriate and helpful for the business. The court compared the Searights case to other cases involving similar issues, such as the case of a farmer who deducted the cost of dynamite

used to blow up tree stumps on his land, and the case of a doctor who deducted the cost of a yacht used to entertain his patients. The court found that the Searights case was more like the farmer's case, where the expense was ordinary and necessary for the business, than the doctor's case, where the expense was personal and extravagant. The court also rejected the IRS's argument that the cat food was a charitable contribution to the

cats. used to blow up tree stumps on his land, and the case of a doctor who deducted the cost of a yacht used to entertain his patients. The court found that the Searights case was more like the farmer's case, where the expense was ordinary and necessary for the business, than the doctor's case, where the expense was personal and extravagant. The court also rejected the IRS's argument that the cat food was a charitable contribution to the cats.

because the C-Rights did not intend to benefit the cats, but rather their own business. The C-Rights case illustrates how the ordinary and necessary test can be applied to different situations and how the outcome can depend on the specific facts and circumstances of each case. The case allows us to see how taxpayers can sometimes use creative and unconventional methods to reduce their tax liability.

as long as they can justify their expenses as being related to their business. I want to emphasize the C-Rights case is one of the rare examples of a successful tax deduction for pet related expenses. Most of the time, the IRS does not allow taxpayers to deduct the costs of owning or caring for pets, unless they are service animals, assistant animals, or working animals. However, as this case shows, there may be some exceptions to this rule depending on the facts and circumstances of each case. 

This by no means is to encourage my listeners to get creative with their tax deductions. Believe it or not, I have many clients ask if they can claim their pets as a dependent. And my response is always the same. No, because they don't have a social security number.

Well, that's all for this episode of Taxing Times. You can also follow us on Instagram @factprofessional and send us a message for other podcast ideas. For tax or accounting questions, you can email our office info@factprofessional.com and don't forget to subscribe to this podcast on your favorite platform and leave review. Thank you for listening and stay tuned for more taxing times.