About taxes, John F. Kennedy once said, ”The slogan—’It’s deductible’—should pass from our scene.” (Special Message to Congress on Taxation, Apr. 20, 1961.) JFK was commenting about expense accounts and business entertainment in the Mad Men era of the three martini lunch. However, his message had broader implications even then.
More than 50 years later, it’s still timely. In fact, ”It’s deductible” can sound downright obnoxious. Someone else—taxpayers—will foot part of the bill, so spend freely, it suggests.
What about the $3.46M an anonymous donor paid to lunch with Warren Buffett? That’s an expensive meal. No one can deny that the lunch is to support a good cause—tax-exempt Glide Memorial Church in San Francisco. But it’s still expensive.
Laura Saunders notes in the Wall Street Journal that if you work out the value of a tax deductible $3.46M, taxpayers are paying $1.2 Million so someone can eat with Buffett. Glide will have to send the donor a letter saying how much is tax-deductible, which depends on the value of the meal. If the food and service costs $100, everything else should be a donation to charity.
This is standard practice at charity auctions and other events. If you pay $250 for something worth only $100, you have a $150 deduction. The Buffett lunch is for up to 8 people including Buffett, the donor, and up to six guests. So maybe the lunch is worth $1,000?
No matter how fancy a restaurant, most of the $3.46M should still be deductible. Oddly enough, Buffett’s presence—or any celebrity’s—isn’t treated as having a value. Although Buffett’s investment advice might be priceless, this lunch excludes investment discussions.
Yet as a practical matter, the lunch might have a huge value for the donor. Want proof? The donor who bought lunch with Buffett last year now helps manage Berkshire Hathaway’s Investment Portfolio. See What Return Does Lunch With Warren Buffett Yield?
Generally, the tax law says you can deduct reasonable business expenses, but not lavish or extravagant ones. So how can this be deductible? The charity context is different.
Tax lawyers may view the world myopically, but taxes play an integral part in most business decisions. After all, a payment deductible against current income is more desirable than one devoid of tax benefits. How could it be otherwise?
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Robert W. Wood practices law with Wood LLP, in San Francisco. The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009 with 2012 Supplement, Tax Institute), he can be reached at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional..