She reported taxable income of about $3.2 million for tax year 2021, and the IRS adjusted it to $4.9 million by disallowing business deductions reportedly claimed through an S corporation, along with certain medical expense deductions. The adjustment reflects the disallowance of approximately $1.7 million in combined business and medical expense deductions.
None of this is interesting or unusual. These are routine audit adjustments involving IRC § 162, ordinary and necessary business expenses, and IRC § 213, medical expense deductions, areas that are typically fact-intensive but legally well-settled.
What is interesting are the peripheral issues that may develop around the case.
Guesses and Predictions
- The value of pre-trial publicity to Spears exceeds the expected cost of litigation and the amount of tax at issue, making it rational for her to litigate even if the technical merits are mixed.
- Absent the publicity value, it would likely not make economic sense to pursue a Tax Court case of this type. Business-expense and medical-expense disputes are generally highly predictable, with limited litigation hazard for the IRS once facts are stipulated.
- The defense may assert, either formally or informally, that the IRS Appeals process was politically influenced or atypical, citing uncooperative conduct or deviations from normal Appeals practices. While difficult to prove legally, this claim can be supported circumstantially through correspondence, delays, or unusual positioning by Appeals personnel. High-profile taxpayers often experience altered institutional behavior, even if unintentionally.
- Spears’s tax counsel likely anticipates a reduction in the assessment by demonstrating willingness to proceed to trial, a common leverage point in Tax Court litigation involving factual substantiation disputes.
- Media coverage will likely frame the case around the principle that an expense is not deductible merely because the taxpayer believes it should be, a theme the IRS has historically reinforced through high-profile enforcement actions.
- The case will likely settle before trial for an amount under $1 million, with neither side fully satisfied but both issuing public statements characterizing the outcome as acceptable.
My Anecdotal Experience
The only tax court case where I represented a (less famous) female celebrity on similar issues decades ago was settled in pretty much the same way as predicted above. Her insistence that the expenses were ordinary and necessary to produce her high income were not views shared by IRS. After learning that tax court would likely rule against her, she settled. We were able to trim the $100,000 tax assessment by about $20,000 through good faith negotiation toward what IRS refers to as ‘effective tax administration’.
As a side note, this same case involved cases of paper records as evidence that IRS refused to consider based on their internal labor constraints.
