Too Tasty for the IRS
Ernie Neve, CPA
September 27, 2017
Most of us like to eat, even if we choose to deny ourselves this pleasure from time to time. And those of us with an entrepreneurial bent often dream of opening a restaurant. Sometimes it's a bustling cafe fronting a busy urban sidewalk. Sometimes it's comfort food served on a rural byway. And when the dream works, it really is a dream. Just ask celebrity restaurateurs like Vanity Fair editor Graydon Carter, proprietor of Greenwich Village's Waverly Inn, or Hollywood legend Clint Eastwood, whose Mission Ranch eatery draws diners and fans to Carmel, California.
Unfortunately, opening a restaurant is one of those adventures that all too often ends in disaster. Sure, FEMA may monitor Waffle House closings as a measure of hurricane intensity. But restaurants are notoriously difficult businesses to run. CNBC reports that about 60% of new restaurants fail in the first year, and nearly 80% close before their fifth year, mostly due to being in the wrong location. So if you're hoping to launch the next food empire, or just cash in on the next food craze (cupcake ATMs, anyone?) it behooves you to spend as carefully as you can — including serving the IRS as little in tax as possible.
Jon Field, his twin brother Joel Field, Eric Schilder, and Paul Butler ran a group of restaurants called Cadillac Ranch, an American-themed eatery paying homage to the classic Route 66 which once wound its way through 2,448 miles of countryside "from Chicago to LA." The group naturally deducted the usual expenses you would expect from a restaurant business, like food, labor, and rent on their store locations. But that didn't seem to be quite enough for their taste, so they started looking for more.
Internal Revenue Code Section 162 states, "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." That's a pretty broad standard, right? You know what they say, one man's "tax avoidance scheme" is another man's "ordinary and necessary." (Who decides in the end? Lawyers, of course.)
So, our plucky restaurateurs decided to stretch the definition of "ordinary and necessary" to include things like personal cars, car insurance, country club dues, and personal credit card charges. One of them used company money to pay his lawn service, home maintenance and repairs, TV and audio systems, and even new granite countertops! (Maybe he thought he could test new recipes in his home kitchen?) They even got their CPA to buy in to the scheme — over a five-year period, he helped his clients burgle $191,000 from the U.S. Treasury.
Sadly, even the tastiest restaurant fads must someday come to an end. When was the last time you saw an actual cupcake ATM? (Mexican food was never just a fad — we're pretty sure the right to tacos is enshrined somewhere in the Constitution.) Although the IRS Criminal Investigation unit opens only about 4,000 cases per year, the Cadillac Ranch made that cut. The Field brothers and the CPA all wound up sentenced to spend time as guests of the federal government, in facilities where the staff proudly dish out mystery meat three meals a day and frown when you ask to substitute a side salad for those high-carb french fries.
Fortunately, there's a better way, at least for you. The tax code offers all sorts of creative recipes for arranging your affairs to pay the least tax possible. That's where we come in. Let's see if we can sit down and cook up a plan for you. And don't forget to leave room for dessert!