Deduction for Taxpayer's Own Work

In 2007, taxpayer worked 1,000 hours developing a web-based business. His proprietorship did not pay him for his services, but did accrue a $50,000 liability for his work to set up the website, based on the $45 to $55 per hour he would have paid an unrelated third party for performing similar website development work. In upholding the IRS's disallowance of the deduction, a Tax Court summary opinion noted that a taxpayer is not entitled to a deduction under the accrual method "if there is no legal obligation during the taxable year to make such payment." In this case, there would have been no legal consequences if taxpayer had refused to pay himself—he would not have taken collection action nor would he have sued himself. This has always been the IRS position and I am surprised that the Tax Court was even willing to hear the case.