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Leona Helmsley: Mixing Business with Personal

Leona Helmsley was rich and famous, and called herself the “hotel queen”. But in her 71st year, she found herself being awarded another title: tax evader. Helmsley was sentenced to 4 years in prison for evading $1.7 million in taxes.

A billionaire herself and married to the real estate and hotel magnate Harry Helmsley, she disagreed with paying taxes. She had famously said, “We don’t pay taxes. Only the little people pay taxes.”

She would claim personal expenses as business expenses. She spent $8 million for making renovations to her new house bought for $11 million, but she charged the renovations as business expenses. Frustrated by the pace and the quality of the renovations, Helmsley got into conflict with the contractors working on the renovations. The contractors suited her alleging that she was evading taxes by claiming personal expenses as business. That brought in the IRS.

In the end, she was convicted of 33 felony counts of tax evasion and mail fraud from 1983 to 1985. The court sentenced her to four years in prison, ordered her to pay $8 million in taxes, interest and penalties, and perform 750 hours of community service.

She pleaded with the judge, citing the ill health of her husband, but the judge declared, “There is a community that needs to be served by the enforcement of the law . . . It is my judgment the motion for sentence reduction should be denied.”

Mixing business with personal interests can result in back taxes, and worse. Only expenses that are ordinary and necessary for business can be deducted as business expenses. In other words, any expense that is necessary for the running or growth of a trade is a business expense, and tax deductible.

To avoid getting into trouble with the IRS, keeping business separate from personal is critical. Going on a business trip for 2 days and extending it to include a vacation can create confusion regarding which expenses to claim as business versus personal.

Deducting business expenses as personal expenses can immediately lead to back taxes as soon as the IRS discovers the discrepancy. The taxpayer is then asked to pay back the taxes owed with penalties and interest, as in the case of Helmsley. Therefore, it is critical to keep business accounts separate from personal for all financial and tax purposes.