These are taxing times.

A solo practitioner deducted the following from his New York City unincorporated business gross income: (1) one-half of his federal self-employment tax; (2) the cost of his self-employed health insurance premiums; and (3) his contributions to a defined benefit pension plan. The First Department rejected the deductions, in Matter of Horowitz v. New York City Tax Appeals Trib., which was decided on June 5, 2007.

The court said that a tax deduction is not a matter of right but a function of what it called "legislative grace," and so the burden is on the taxpayer to establish entitlement to the proposed deduction. Here, the court said that the attorney did not meet his burden. "The subject payments, although deductible for federal income tax purposes, can be reasonably construed as remuneration for services for petitioner's benefit, and, as such, are not deductible under Administrative Code of City of NY § 11-507(3)."

There was a lengthy and vigorous dissent which argued that "[a]s a matter of law, the deductions are not payments that are income to petitioner and are not in the nature of compensation for services he performed." The dissent concluded that, under the majority's rationale, "every payment by a sole proprietorship to a third party would be disallowed under § 11-507(3)," and that is unreasonable.