Meanwhile, while most of us do our best to fill out those tax returns straightforwardly, there are a creative few. The IRS saw fit just last week to issue Revenue Ruling 82-74, which tells about the taxpayer who paid someone to burn down his building, which was suffering mounting operating losses and was declining in value. After the fire, he took a tax-saving capital gain on the insurance money and deducted the arsonist's fee as a business expense.
A year later, our creative taxpayer was caught and convicted. He returned the insurance money, but then had to deal with the tax man. The IRS ruled among other things that the arsonist's fee was not deductible and that the insurance gain had to be taxed as ordinary income, which hurts more. Revenue rulings are not usually published for just one strange incident unless it "has broader implications than the instant case," an IRS spokesman said. The IRS previously had ruled about the bad things that can happen to you, tax-wise, if you burn down the building yourself (instead of hiring an arsonist) and don't get the insurance because arson is discovered. Signs of hard times.