You Can't Squeese Blood Out of a Turnip

In Kathleen A. Vinatieri the IRS tried to collect money from a person who didn't have enough to live on if she paid her taxes. IRS wanted her to file deliquent returns before it relieved her of having to pay before it waived collection in her situation.

Palm Canyon X Investments, LLC

This case involves some celebrity.

Palm Canyon X Investments, LLC through AH Investment Holdings, Inc., its tax matters partner, challenged the IRS in the United States Tax Court. The Tax Court filed its opinion on December 15, 2009. The IRS won the case. The case involves tax shelter-type issues. Palm Canyon, a single-member limited liability company owned by AH Investment Holdings, entered into some contracts known as "offsetting market-linked deposit contracts." So what? you say. Well, it was all important enough for a judge to write a 104 page opinion, including his conclusion that Palm Canyon was a farce --- a sham --- and that the market-linked deposit contracts lacked economic substance and could be disregarded. Of course, I won't be giving all the details here, but it is interesting to note that the case involves the actress, Suzanne Somer, and her husband, Alan Hamel, and the well-known "Thighmaster" exercise equipment.

Furthermore, in this case, the government was represented --- at least in part --- by two of my former colleagues at the IRS, Stephen M. Barns and David Sorenson, who were attorneys with District Counsel. David's office was two or three offices down from mine. Stephen's --- who incidentally went by Mark, his middle name --- worked in an office down the hall and then to the left a couple of offices, almost on the other side of the building. Anyway, I thought that was interesting.

Our Convoluted Tax & International Business Systems

This was a win for Symantec, who sent something like 14 lawyers to the Tax Court to face off against the 7 for the IRS before Judge Foley. The Tax Court found the government's case arbitrary, capricious, and unreasonable.

If for some irrational reason you want the flavor of just how complex things can be in taxation relative to international entities and a single issue, consider reading this case, which has 71 pages and a table of contents as follows:

CONTENTS

Background

I. Storage Management Software Products

II. Product Distribution Channels

III. Intensely Competitive Market

IV. Product Lifecycles and Useful Lives

V. Geographic Expansion

VI. The Cost-Sharing Arrangement

VII. VERITAS Ireland's Operations

VIII. Procedural History

Discussion

I. Applicable Statute and Regulations

II. Respondent's Buy-in Payment Allocation Is Arbitrary, Capricious, and Unreasonable

A. Respondent's Notice Determination Is Arbitrary, Capricious, and Unreasonable

B. Respondent's Determination in Amendment to Amended Answer Is Arbitrary, Capricious, and Unreasonable

1. Respondent's "Akin" to a Sale Theory Is Specious.

2. Respondent's Allocation Took into Account Items Not Transferred or of Insignificant Value

3. Respondent's Allocation Took Into Account Subsequently Developed Intangibles

4. Respondent Employed the Wrong Useful Life, Discount Rate, and Growth Rate

III. Petitioner's CUT Analysis, With Some Adjustments, Is the Best Method

A. Comparability of OEM Agreements

B. Unbundled OEM Agreements Were Comparable to the Controlled Transaction

IV. Requisite Adjustments to Petitioner's CUT Analysis

A. The Appropriate Starting Royalty Rate

B. The Appropriate Useful Life and Royalty Degradation Rate

C. Value of Trademark Intangibles and Sales Agreements.

D. The Appropriate Discount Rate

V. Conclusion

Yikes! A Casualty Loss!

In 2005, Justin Rohrs bought this nice, new truck, a 2006 Ford F-350, for $40,210.65. (Those who know me very well will perhaps know why that fact interests me.)

Anyway, a couple of months later, he went to a gathering at a friend's house where there was drinking, but he rode to and from it with someone else to avoid driving while intoxicated. After he got home from the gathering, though, he started off to his parents' house too soon. On the way, he didn't negotiate a turn --- he said there was a severe wind --- and the truck slid off the embankment, rolled over, and sustained harsh damage. Justin's blood-alcohol level registered 0.09 percent (the legal limit was 0.08 percent), so the police cited and arrested him. Justin filed a claim with his automobile insurance, but it was denied under the terms of his policy due to the DUI.

Ouch.

The next step for Justin, then, was to ask for a grace from the government in at least reducing his income taxes because of his casualty loss. He'd still have to pay for the damages, of course, or go without a truck, but at least he'd have his taxes reduced by being able to deduct his loss. He claimed a $33,629 casualty loss deduction for the damage.

IRS said no. Not only no, but they claimed that Justin was acting inappropriately by even claiming it. IRS asserted a penalty for Justin's inaccuracy.

Justin went to the Tax Court --- on his own (aka pro se).

The Income Tax Regulations provided that a crashed automobile could be a casualty loss if the damage wasn't due to a willful act or the willful negligence of a taxpayer, that is, of Justin. Justin said, naturally, it wasn't and that he wasn't willfully negligent; IRS maintained he was. IRS also said allowing Justin the grace would frustrate public policy.

Who won?

Justin did. It seems almost the very least that could/should be done considering the severe damage to his nice, new truck and the facts and circumstances of Justin's case.

Overall, the case is about analyzing the line between mere negligence --- which Justin admitted to --- and willful negligence and also what constitutes "the frustration of public policy."

Tax Protestor Antics

ROBERT CHARLES & LISA JEAN ABELL weren't able to ring a bell in defense of their frivolous arguments against IRS when they appealed their lower-court loss to the Tenth Circuit. They appear to have acted more like Cain than Abell.

Start-up Expenses, Office-in-the-Home, and More

JOHN Y. DING faced the IRS in Tax Court relative to what they claimed were his "business expenses." He claimed a bunch of expenses relative to his employment and a prospective business he was trying to get off the ground. It results in an interesting discussion and analysis of various matters including start-up expenses versus business expenses, rules governing an office in the home, and documentation, including the application of the Cohen rule.

Education Expenses --- Are They Deductible?

This case gives a good review of applicable law:
LORI A. SINGLETON-CLARKE vs COMMISSIONER OF INTERNAL REVENUE

It involves a RN who went back to school to become more effective in her then-present duties. She realized that nursing had evolved greatly in the 24 years since she earned her bachelor’s degree, and she felt disadvantaged working with highly educated doctors.

Ronald Davenport

I had to mention this case. I just had to.

I knew a Ronnie Davenport growing up. His brother, Tommy, was one of my contemporaries and best buddies. The Davenports I knew as a boy were all the most clever and interesting people. Ronnie, as I recall, was into short-wave radio, among other things. This was back before cell phones --- even before a lot of people had land-line telephones or TVs. I was always way impressed with Ronnie talking on that radio with people all around the world. It reminds me of the opening scene of the movie Contact. Of course Ronnie was no Jodie Foster and wasn't trying to contact a deceased parent. His parents were very much alive.

Anyway, the guy in this case couldn't be Ronnie from my boyhood. No way.

Ronald Davenport (of the case) faced the following proposals for more tax and penalties:

The Judge opined:

Petitioner is no stranger to the Court. The following is petitioner's history in this Court:

Well, I won't bore you with the details --- if you want them you can just read the opinion --- other than to say Ronnie did not cooperate with IRS and lost his case. He looks like the typical tax protestor, making silly, frivolous arguments that won't fly.

Two Tuesday Memo Decisions

The Tax Court issued two memorandum opinions today. One involves the determination that Linda Bruen was an innocent spouse, even though that terminology always seems like an oxymoron to me. The other one has to do with the nature of income from a cashed-in life insurance policy that the Barr couple received and the accuracy penalty the government said was attributable to them not properly reporting the nature of such incom.

What's in a Name?

Peter M. Comensoli challenged the IRS in Tax Court. He was represented by Matthew S. DePerno. Alexandra E. Nicholaides represented the IRS. The IRS wanted to use its lien and levy powers to collect some taxes from Peter. Peter didn't want that to happen. The judge was named Goeke --- I didn't look up the rest of his name. Some of the players in the case were Paradym Group and A. Adonu Idahosa (makes me wonder what the "A." stands for). Symphony Financial Services was a player as was TCF Leasing, Inc. So was Back Porch Workout. Some of the action took place in Kalamazoo, Michigan.

I'm wreddyornot. Who are you?

Laughing Out Loud

These lines from a tax decision struck me funny. "Anthony Oropeza earned wages in 2002 and 2003 but reported zero income and zero tax liabilities because, he wrote in attachments to the returns, his income was not 'income' in the 'constitutional' sense. Mr. Oropeza’s position is, in a word, 'frivolous.' Just like we held it was the last time he was in Tax Court."

Heather Moore: ALMA vs. Maia

Heather Moore was gracious enough to let me read her new novel, ALMA, and I am glad I did. I haven't read too much fiction for her intended audience, so this was somewhat new for me. I recommend it to anyone interested in having the life of Alma the Elder from the BOOK OF MORMON more fleshed out. I also recommend it to anyone otherwise interested in reading fast-paced fiction involving elements of romance, friendship, and religious devotion.

For me, the book ALMA is misnamed, though.

Its predominant character, for me, is Maia, wife of the malevolent King Noah, the chief, if subtle, romantic hero, or, if you will, romantic interest, in the novel. Maia's story is much more compelling than Alma's; in fact, Maia's story is gripping enough for me to read the entire book despite any other defects, such as why Moore starts out in Amulon's point-of-view: "Amulon stared at the king's red face," she writes in her opening line, "wondering if he'd ever hated a man more."

Now that's a nice, strong, and potent sentence (although I couldn't help smiling, and having the author's name so clearly in mind, as I read, " . . . a man MoOre.") And there's no question but that Amulon lives up to that first characterization of him, and even finds a man to hate greater than he hates the king with the red face. But, I ask, where are Alma and Maia in these first few pages? They are reference material. I don't know if I've ever started a published novel in the antagonist's point-of-view with the protagonist in the background. Do you recall any?

Well, for me, it was disturbing. In analyzing it, I couldn't help thinking of some favorite characters: "My suffering left me sad and gloomy," says protagonist Pi Patel from LIFE OF PI; "When he was nearly thirteen, my brother Jem got his arm badly broken at the elbow," says Scout from TO KILL A MOCKING BIRD. And THE ROAD starts out, "When he woke in the woods in the dark and the cold of the night he'd reach out to touch the child sleeping beside him. " It is clearly in the protagonist's point-of-view. Even Orson Scott Card's SARAH --- not that it's a favorite of mine, but it does inhabit a similar genre --- starts: "Sarai was ten years old when she saw him first."

Anyway, this Amulon character is, at the outset of the novel, a high priest in King Noah's court, an old friend of Alma's before Alma "got religion." Although, to be accurate, it's actually before Alma gets "true" religion, for Alma had been a high priest in the religious order in the king's court already. So, in its essence, the story is the juxtaposition of orthodoxy and apostasy, with Amulon serving as the prototype for the one, and Alma as the ideal for the other.

It seemed that the main characters in the novel --- Alma and Amulon, in particular, --- were drawn so sweetly good and grotesquely bad, without much (any?) ambiguity at all; that there were no real struggles with temptation or any need for repentance. Their minds were made up; they were where they were and what they had become, and it seemed there was little or no chance for them to change. Even if characters always chose right . . . or wrong --- And that just doesn't happen, does it? --- it seems some struggle with temptation to do evil or desire to repent ought to be evident, and that struggle ought to be conveyed in a work of fiction. Even prophets admit failings, weaknesses. But Alma is " . . . inside his soul . . . truly free. He was true to his convictions, his faith, his Lord. His increasing burdens were made light . . ." From outset to the end, it seemed to me.

Whether or not one accepts the BOOK OF MORMON as a historical document --- and there are adherents of the Mormon faith who don't or who place some limitations on it --- this admixture of what is clearly fiction with the chronologies and language from Mormon scripture is an interesting, and at times compelling, phenomenon. I've read Diamant's THE RED TENT, which is based upon Old Testament characters, and enjoyed it very much, but, for me, reading a character out the BOOK OF MORMON, seemed a uniquely new and exciting adventure. Of course, such an undertaking is nothing new to Moore , who has already written about ABINADI from the BOOK OF MORMON, winning, I see, various awards within a growing audience for doing so.

Now, Moore does a great job fleshing out the basic narrative of Alma and his contemporaries in her novel, using a cast of other interesting characters: Helam and Raquel, King Noah, Amulon, Jachin and Lael, Gideon, and, especially, Maia. She does so using both animate and inanimate characteristics from her source material, making the story more interesting and forceful than the original text. Readers --- at least this one --- are less likely to fall asleep or get bored reading this kind of story, where they can identify with and become more invested in the characters, the relationships, and the places the characters visit and experience, than when simply reading raw scriptures without any ancillary imagination --- not that people ever do that, of course. The orthodox believer will perhaps scoff and scorn, saying that the spirit works only through the original text. My experience, and it appears many others', differs.

At the end of the day, however, I felt closer to Maia than I ever did to Alma. But, like I said above, it was well worth my time and effort to read ALMA and to be obliged to consider more fully his life and story.

Why Isn't This Fraud IRS?

WILLIAM G. HALBY, a lawyer in New York for 40 years, specializing in tax law, frequented prostitutes and kept track of his visits in a journal and purchased pornography and books and magazines on sex therapy, apparently keeping decent documentary evidence of the costs. He then claimed medical expense deductions of $76,314 in 2004 and $49,203 in 2005 for these costs.

Fraud and Other Stupidity

Ron and Tricia Bell got greedy. They faced additional taxes and penalties, including ones for fraud. The Tax Court reached a decision on Wednesday.

Big bucks. Interesting story . . . well, maybe not so much. Use your imagination. Check it out if you are interested in cheats.

Another Doctor Claims His Wife's Horse Losses

Wednesday, the Tax Court issued an opinion in a case involving another doctor whose income supported his wife's horsey losses that the IRS said were hobby losses. See the Phemister case to read about it. The case also covers innocent spouse, failure-to-file, and negligence penalty issues.

A New Tax Book

I haven't posted here in quite a while. It hasn't felt very compelling to do so. It's not that there isn't plenty to say, or news that breaks every day relative to the tax aspects of writing or other artistic activities. It just hasn't stirred my interest or seemed very productive over against other things I've been doing.

However, lately I've been thinking about another tax book for writers and artisans. What I have in mind is collecting information from authors and artisans who have had experiences with the IRS. Or even those who haven't. What I don't know, I guess, but want to, is what people entering into the business of writing or an artistic activity do with respect to the costs they incur before they have enough income to have a net profit. Do they utilize the tax benefits of such losses? Or do they mostly just forgo them and concentrate on getting to a profitable status before worrying about taxes? I would like to do an exposé on such information and experiences, if possible. If everybody who writes and gets published is filing tax returns with losses reflecting their costs in advance of profitability but not having any problem with the IRS, it seems that would be invaluable information for newbie writers and artisans to have. And what about all the people who never get published or get their artistic endeavor off the ground, but incur costs trying to do so? Are they claiming the tax benefits and getting away with it without a challenge or are they challenged? And, if they are challenged, what is the result?

Anyway, that's what I've been thinking about. Maybe it's something useful; maybe it's not. How would I go about gathering the information? Most writers these days maintain personal blogs and webpages. There may be okay to make contact that way. Also, I might formulate a questionnaire or something to help gather pertinent information.

Also, it might be interesting to explore what types of deductions experienced and successful, profitable, writers claim relative to their tax returns and their experiences relative to such claims over against IRS and audits. I'm thinking along the lines --- and this is a somewhat dated, even out of date, example --- of somebody like James A. Michener. He must have incurred many living expenses in being away from home in doing his research to write in depth about such localities as Mexico, the South Pacific, etc. How much of what he incurred did he deduct? And I need to find contemporary authors to query in such matters.

Just some thoughts.

Rick's Writing Was for Business

Rick, the writer, did have a viable business, according to the Tax Court; his writing activity was not a hobby.

What made the United States Tax Court conclude that he was in the business of writing?

First off, the court believed Rick conducted aspects of his writing in a businesslike way. He hired agents to help him negotiate prices for the sale of his screenplays.

He had a long history as writer, with publishing credits and success in the endeavor. Because he had worked in the field for such a long time, he had numerous contacts. Furthermore, he devoted a lot of time and energy to writing.

One of the biggest factors, though, had to be that he didn't have any income from many other sources to speak of. This meant that he and his wife didn't derive a great deal of tax benefit by claiming the loss he incurred.

The court also recognized that writing has a precarious nature, especially as relates to the entertainment industry.

Now, how did Rick fare in deducting the expenses he said were for writing?

Rick the Writer

Maybe I've mentioned this case before. If so, I'm going to mention it again. It came out in 1999, about ten years ago now. It is a United States Tax Court case, TC Memo 1999-163 involving Rick and Ruth Richards. The Richards represented themselves before the court. IRS audited them and determined a deficiency for the year 1994, some sixteen years ago now. The deficiency that the IRS alleged was $1,328 and they asserted that the Richards had not exercised ordinary business care and prudence by alleging a penalty in the amount of $266.

Rick was a writer. He deducted a business loss relative to his writing activities. The IRS said his writing activities didn't constitute a trade or business, but comprised a hobby. For this post, I will handle that issue. Other issues will come in subsequent posts.

The Richards lived in Palm Springs, California.

Among expenses Rick claimed relative to his writing were the following:

Typewriter (ribbons and repairs)	$198
Stationery, desk and office supplies	940
Registry	680
Copies	370
Research books, magazines & trade publications	760
Must-see movies, stage plays, country and gospel concerts	1,140
Travel trailer maintenance, supplies and repairs	2,480
Research trip to Alaska	3,296
Research trip to Mexico	1,319
Miscellaneous (primarily travel expenses)	3,120
TV sets, the VCR & videotapes	569
Audio tape-recording & copying equipment plus studio time fees	560
Fax messages and responses	115
Shipping costs	1,189
Office preparation	180
Long-distance calls	1,114
Cash telephone calls	240
Total	18,684

 

The Richards were both in activities that were challenged by the IRS as hobbies, so it is difficult to set forth exactly what expenses were Rick then what expenses were his wife's. She was an actress. Their combined losses relative to their respective activities of writing and acting were something like the following for the years preceding and succeeding the year that was before the court:

Year	Income	Expenses	Profit/(loss)
1991	---	$28,307	($28,307)
1992	---	29,103	(29,103)
1993	---	30,616	(30,616)
1995	---	---	(24,278)
1996	$814	30,877	(30,063)

 

The Richards did have income from their activities from 1991 to 1993 but reported it with their wages. The income amounts were nominal in comparison to the expenses they claimed.

Rick's first job as a writer came in 1940 when he wrote stage material for Bob Crosby's band. It was intended to be funny and included lyrics, parodies, and original songs. He also ended up working for various publishers in New York. During one period of time he served in the military. In the 1950s, Rick started writing short stories. He lived in Pennsylvania and wrote 88 short stories has sold 39 of them. He also started writing novels.

The Richards actually married sometime in the early 1960s and that is when they moved to Palm Springs. Rick continued writing novels at first but soon put that aside to work in the blooming and more-lucrative entertainment business. He obtained contracts with various comedians and met producers through them. As a freelancer, he ended up writing situation comedies, and he was able to sell his work doing sitcoms throughout the 1960s and 1970s. Some of the familiar shows he wrote episodes for include The Lucy Show, The Odd Couple, Love American Style, The Addams Family, The Beverly Hillbillies, and Petticoat Junction. In 1974 he sold a screenplay to a Canadian company.

By the 1980s, Rick no longer found writing sitcoms that fun; the novelty had apparently worn off. He switched to ninety-minute television movies. However, the networks didn't cooperate and canceled their ninety-minute movies. So Rick switched too. He started writing screenplays for the two-hour timeslots the networks then wanted. In the 1980s and 1990s, he branched out, trying different things. Things start to slow down and fall apart. One project got scheduled for three different occasions but canceled at the last minute each time. Another time, Rick received an option payment of $1,500, but the company, Columbia Pictures, never exercised the option. Rick testified that various producers and directors and whatnot were interested in his work, but things just didn't work out. He tried to work out specific deals with specific individuals, around the problems and things got canceled or placed in abeyance.

Rick didn't have a regular agent. If he thought he had a deal to work through, he would hire an agent to discuss money with the executives of the movie industry. He said agents were able to get more money for his work.

Rick's mode of operation was to work on 4 to 6 different screenplays at a time, knowing that if he sold just one of them it would be quite lucrative. In 1993 or 1994 he pitched an idea about a screenplay to an agent with Creative Artists Agency. The agent thought highly of the idea and indicated he would try to market it. Rick got busy and wrote the screenplay, but by the time he went to trial it had not been sold.

Sometimes Rick wrote lyrics for country and gospel songs. He didn't write the melodies and so most of his experiences writing lyrics were collaborative. In order to facilitate his lyric writing, he traveled to numerous country and gospel concerts. However, he never sold the song.

So that's pretty much the facts the court said it dealt with in deciding whether or not Rick had a viable trade or business as a writer.

So what do you think? Did he have the requisite continuity of activity and the profit motive?

IRS Strategic Plan

Contrary to what may be intuitive, IRS has a strategic plan. It is a plan that ran from 2005 to 2009. You can read it online, at IRS.gov. If you can't sleep, I recommend it. The nice thing about the plan is that it expires this year which means there will be a new one. Of course, the IRS can plan all it wants to do this or that, and just like anything else, if it doesn't have the funds to carry out the plan it is all for naught. The same is true of any government agency and it can have profound effects upon any number of things, witness the financial meltdown due to the government's failure to adequately fund agencies that oversee the financial markets.

Anyway, the strategic plan of the IRS will contain a message from the Commissioner of Internal Revenue Service, a statement of the agency's vision and mission. It will give some sense of the organization structure in charts and whatnot. It will then spin its perception of the factors that affect its achievement of its vision and link the strategic plan to the budget and its ability to perform. It will name key partners in achieving strategic goals of the agency.

Among goals listed there, you will find that IRS intended during that timeframe to improve its taxpayer service, it intended to enhance enforcement of the tax law, and it intended to modernize the IRS through its people, processes and technology. If you're interested in any of that gobbledygook you can read it there on the IRS website. Like I said, it is probably all good for sleep inducement. But you might be interested nonetheless and get something useful out of reading it. I doubt it, but maybe you'll want to give it a shot.

Bank Deposits Analysis

If a taxpayer fails to file a return, there are several things IRS can do to get around that. If the taxpayer is employed, it gathers the employers W-2s and 1099s and utilizes them to construct what a return would look like. Say, however, the taxpayer is self-employed --- maybe he operates a bookstore or some other retail outlet. What does the IRS do then? Well, if the taxpayer kept checking and savings accounts, IRS might utilize those accounts to reconstruct his income from the deposits in them.

A good example of IRS doing that is a case issued by the United States Tax Court today, the case of BLAKE HYUN SEO. You can view the case at http://www.ustaxcourt.gov/InOpTodays/Seo.TCM.WPD.pdf . I'm not certain how long that link will work, though, because the opinion will only be a "today's opinion" today. However, you can do a search any time using his name on the United States Tax Court webpage and find the case.

Office in the Home

Most writers I know plan to do their writing, at least most of it, at home. So I guess if you consider your writing activity a business, the temptation is to deduct every household expense you can conceive of as a business expense. After all, you work at home.

But you need to be careful and be aware of the rules. Remember, tax law distinguishes between what is personal and what is business. Generally, rent, mortgage payments, repairs on a residence and the like are not deductible. They are considered personal living expenses. You have to have some place to live. In tax administration such expenses are usually personal.

In order to get a business deduction for the use of your home you must use part of it (1) exclusively and regularly as your principal place of business, as a place to meet or deal with patients, clients or customers in the normal course of your business, or in connection with your trade or business where there is a separate structure not attached to the home; or (2) on a regular basis for certain storage use such as inventory or product samples, as rental property, or as a home daycare facility.

Now, the assumption is that you're working as a proprietor, not as an employee of someone else. If you are an employee who receives a W-2, in order for you to claim a deduction relative to the use of your home you must be able to prove, in addition to the other things mentioned above and talked about below, that the use of your home is for the convenience of your employer and that the portion of the home so used is not rented by the employer.

Now let's talk about all of that. First, exclusivity. Note that. It means entirely. It means you don't use it for anything else. Supposedly, you don't eat there, cook there, or do your wash there. You write there. Now, I know there's going to be someone out there who is a freelance writer who specializes in writing articles about cooking and producing cookbooks or some such thing. And they are saying, what about me? My writing about cooking and producing cookbooks entails more than just putting words down on a piece of paper or in a computer. Okay. I can buy that. But it's more likely that you use whatever area you use for cooking as an adjunct to your writing also for personal purposes. Where do you cook your meals that you consume? Or that your family consumes? The more you look for exceptions to what "exclusive" means in this way, the more lack of clarity it has as to "exclusivity" and the more chance you have of having it questioned.

Regular use means that you use the area for your writing on a regular basis, not incidentally or occasionally. Regular versus incidental and occasional. That's the test; only regular use qualifies.

 

Surprises

My oldest son brought a gal home tonight for us to meet, a friend he met way back in grade school and hasn't seen for years. The young lady now lives in Boston where she works in real estate as a broker. She says times are rough in real estate right now, not a surprise to me, but fortunately she said her office handles a lot of rentals that apparently keeps her in the black.

My boy had told her about my tax book for writers and artisans. (He might be impressed." He wanted me to show her a copy, so I did and she ended up taking it with her to read. Her degree is in German and music. She aspires to opera but has had to settle for a more practical occupation. She related how difficult it was for her to fill out online her 1040 this year and how not having properly estimated and paid in estimated payments of taxes in advance had been a shock to her.

I guess it's better to be shocked than to have paid nothing and owed nothing in taxes, for that would suggest not much if anything was made. But still, it is always a good idea, almost a necessity, to keep a running account of where you are profit-wise. That way, you don't get surprised and you can change your mode of operation if you need to. It also means that you're doing a fairly decent job of keeping records.

Gabriel the Comedian

In February, the United States Tax Court issued an opinion in the case of Gabriel J. Loup. Agents or auditors of the Internal Revenue Service had determined that Mr. Loup owed more taxes for his 2003 federal income tax return than he had reported or paid. The dispute revolved around his entitlement to claimed business expense deductions. IRS said he couldn't deduct expenses he had wanted to. Gabriel represented himself before the court; he didn't hire an attorney to represent him.

You have to be careful of the judge you get. In this case, Gabriel drew a judge named Wherry. Now, that has to give you pause and make you wary, doesn't it? Some might say it should be enough to let the case go and not argue it. Anyway, I suppose Gabriel didn't know he would draw that judge and decided to proceede anyway. Afterall, Gabriel aspired to a profession in comedy.

Yeah, Gabriel wanted to be a standup comedian and actor. He had some experience to tell the court about. As a matter of fact, in October 2002, he had signed a contract with the Morgan Agency for a one-year period. The agency would act as Gabriel's agent for some television commercials. Gabriel also had a regular job. He was licensed as an intensive care unit nurse and worked as a pharmaceutical company representative.

Gabriel said he became a member of the 9 Layer Dipz, a sketch comedy group, in 2002 or earlier. The group, 9 Layer Dipz, wrote, produced, and directed its own comedy shows.

On his tax return for 2003, Gabriel claimed deductions on Schedule A that totaled $16,704, $12,811 of which were listed as "job expenses and most other miscellaneous deductions" which actually represented $13,761 of expenditures limited by two percent of Gab's reported adjusted gross income for the year. He detailed the expenses on an attachment, a Form 2106-EZ, used for deducting unreimbursed employee business expenses. He also stapled an explanry statement to his return.

The first thing that should be noted is that Gabriel's tax return preparer put these expenses on the Schedule A and then detailed them on the Form 2106-EZ erroneously; they should have gone on a Schedule C. The preparer, it appears, didn't know what he was doing.

During the trial, Gabriel and the IRS argued about whether his activity relative to comedy was a hobby or not. Of course the IRS said it was a hobby and Gabriel said it most certainly wasn't. Most of the evidence Gabriel submitted was intended to prove that the activity wasn't a hobby, but most of the evidence he had also postdated the year at issue, 2003. Eventually, IRS gave up on the hobby issue, conceding it, and argued that Gabriel wasn't in a business yet as a comedian so he couldn't deduct the expenses. It basically said that Gabriel had only done his comedian routines sporadically up to the end of that year and, therefore, it wasn't a going concern. It said he failed to substantiate the expenses and said many of them were personal and not business expenses.

Gabriel provided four advertisements for 9 Layer Dipz but none of them indicated which year they pertained to. Some of them did provide the day and month of a performace but not the year. Gabriel said at least one of them pertained to 2003, but the advertisement itself said it was going to happen on a particular day, a Wednesday or some such, and that particular day on that particular month in 2003 was not a Wednesday. Ah oh! Also, it became apparent that Gabriel had created a log that didn't coincide with anything else and appeared to be made up. Double ah oh!

The evidence indicated that all of Gabriel's performances with 9 Layer Dipz occurred in 2004 not 2003. Even the contract Gabriel had entered into in 2003 was not helpful because it didn't establish that he had ever performed as a comedian or actor in 2003. The court concluded Gabriel had not demonstrated active involvement in acting or comedy in 2003.

Gabriel lost his case because he didn't have his facts straight, didn't have his evidence properly lined up, wasn't entirely prepared, didn't have a business plan, and probably another few dozen reasons that could be listed. Preparation precedes power. If you're not prepared, don't expect to have any power to persuade a revenue agent or a tax auditor, or, for that matter, the United States Tax Court over agains what an agent of the IRS says.

April 15, 2008 is this week

Wednesday is the due date for filing individual income tax returns. It is a day to account for income earned in 2008. The law actually gives taxpayers a grace period from January 1 to April 15 to settle up for 2008.

Lots of taxpayers don't recognize that the income tax system taxes them throughout the period of their efforts and pay. A person owes tax throughout the particular year they work; it is a pay as you go system. Therefore, taxpayers who work as employees are required to have income taxes and FICA withheld and paid over throughout the year that they work. Self-employed individuals are required to make estimated tax payments to cover the taxes they will owe on the income they earn as they go along. If the withholding or estimated tax payments aren't adequately sufficient, penalties can result.

In any event, if the taxpayer gets in trouble in a subsequent year for what they put on their 2008 income tax return, and they have to pay additional taxes, they will also have to pay interest calculated from April 15, 2009. On the other hand, if a taxpayer discovers an error they made on their 2008 income tax return sometime next year or the year after, and they make a claim for additional taxes to be refunded because of their mistake, the government will owe them interest on the amount due to them because of the same rationale. Now, for what it's worth, Congress didn't make it entirely evenhanded. The interest rate you pay on underpayments of tax is in excess of the interest rate you receive on overpayments of tax. Now, you would have guessed that, wouldn't you? You know, you are dealing with politicians who were elected to represent you and your government.

WRITE NOW

An old joke goes that the Postal Service recalled a new stamp because they pictured Internal Revenue Service agents on them. The problem was people couldn't figure out what side they should spit on

We've come a long way. We don't spit on stamps anymore.

How about revenue agents? Would we just as soon spit on them? One theory I have about the current economic meltdown has to do with the inadequacy of our Congress to fund the enforcement of the laws that it has enacted, including the Internal Revenue Code

Another witticism asks, "What do you call twenty-five tax auditors buried to their chins in cement?""Inadequate cement."

This kind of thinking, I believe, got us to where we are financially as a nation.

If you're going to be a writer professionally, act professionally. Write! Take writing classes. Formulate a business plan. Join a critiquing group. Attend a writers conference. Pitch what you have written to publishers and agents. Submit pieces to contests. Keep business records. Model an exemplar. Get published. Write!

MISCELLANEOUS ACCOUNTING STUFF

This year it is likely that a lot of people have lost value in their investments, but it doesn't necessarily follow that they will have losses on their income tax returns that are due beginning April 15. However, some may have losses from other than investment. If they were ripped off, they can take a theft loss. But there are a lot of ifs even in that. A person has to make sure there is not some possibility of a recovery through a lawsuit or some other means. Timing is also important. The theft loss has to have occurred during the taxable year it is claimed.

Sometimes all of the qualifications and criterion stink like Yellowstone sulfur pots.

Our elected officials who make the laws are often fatheads. If they weren't, we probably wouldn't be in this financial mess we are in as a nation.

Accounting is a yawner and accountants are... well, lackluster. Uninteresting. Boring. Nonetheless, it is important if you are in a trade or business, to pay attention to at least rudimentary accounting. That doesn't necessarily mean you have to know what debits and credits are or that you have to hire a professional accountant like a CPA. But if you do choose to hire somebody to help you, make certain the individual is someone you can trust. And I would say, don't continue to give that trust without checking up yourself on the individual and their work.

Ultimately, you are responsible for your system of accounting and what you claim on any return. The accountant is not generally responsible. There are exceptions of course, but this involves the law and by now you should know that the law always has its complications and exceptions, etc.

Sloppy books and jumbled records can point to a hobby. You want to avoid that.

RICHIE, THE ARTIST AND ACCOUNTANT

Congress makes plans. It plans on some people and businesses paying taxes --- but not everybody. It exercises intricate legislative planning to allow certain contributing constituents to avoid taxation, but not others. Often when the public discovers hidden taxes, Congress's solution is not to do away with the concealed taxes, but to hide them better. In similar fashion, you have to plan well and to follow your plan to show that you are in business to make money, whether or not you have made money yet.

Ritchie --- my nickname for him --- from Chicago attended Northern Illinois University between 1971 and 1977. He majored in art and minored in accounting, quite a combination. He never did graduate. But by 1978 he had passed the CPA exam and was in 1983 in Illinois practicing as a CPA. Between the years of 1978 and 1984 he held various positions as an accountant.

From 1992 to 1995, Ritchie operated his accounting and artistic activities out of the building where he both worked and lived. He started treating his artistic and accounting activities in 1984 as sole proprietorships. That is, he filed two Schedules C. Those activities from 1984 to 1998 reported the following losses and profits:

Year	Artist Activity	Accounting Activity
1984	($544)	($3,272)
1985	(1,966)	6,334
1986	(617)	7,201
1987	(1,978)	10,063
1988	(7,959)	9,518
1989	(27,638)	16,824
1990	(27,300)	19,977
1991	(26,930)	26,930
1992	(31,774)	17,385
1993	(13,419)	13,419
1994	(18,384)	20,821
1995	(10,922)	19,951
1996	(934)	26,888
1997	(1,586)	17,737
1998	(4,071)	-0-

 

Richie never garnered much gross income from his artistic activities. His gross income from artistry from 1992 to 1995 was only $770, $320, $266, and $357, respectively. Thus, we see that his personal maintenance and sustenance all came from his accounting work. When he got audited by the IRS, he was able to produce good financial records to show that he had incurred all of the expenses that he had claimed. What he didn't keep, however, were records of a budget for financial projections for the artistic activity. He didn't predict the costs he might incur in attempting to develop his artistry. Thus, he hadn't planned well. So at trial it didn't go all that well for him.

Ritchie had at first decided to create a commercially viable product from nude drawings. It apparently didn't work out. He also tried fashion illustrations and spent lots of money for props and materials. That also never worked out. He never received much of a clientele and obviously never earned anything from it. Next he tried portraitures and then installation art displays. Maybe he did those two concurrently, I don't remember. Anyway, for $1,200 he placed two advertisements in his newspaper to solicit work. Between 1992 and 1995 he received two commissions for portraitures that generated about $850. From 1992 to 1995 he also created four displays of installation art --- of peppers, dolls, pumpkins, and cucumbers --- which he exhibited in front of his residence, trying to sell them or the concept. The media did two newspaper articles on the dolls in 1994, and mentioned it in another newspaper article in 1995. They apparently weren't too upbeat on peppers, pumpkins and cucumbers. His income from installation displays totaled a measly $88.04.

IRS audited Richie. First it took on 1988 through 1991. He lost in the Tax Court. That didn't deter him from claiming additional losses from 1992 through 1995. Again he took the matter to court. The court in the new case said:

[Ritchie] has not made any significant changes in the operation of his artist activity, during the years in issue here, that would create a market or allow him to benefit from a market for his artwork or allow him to make up for his substantial losses. In [his earlier case before this court], we explained [that] 'the large unabated expenditures, the absence even at this late date of any concrete business plans to reverse the losses, and the manner in which [Ritchie] conducted his artist activity lead to the conclusion that this was not an activity gauge tin for profit.'

Make your business plan. Live by it. It should change and develop just as a new baby grows and matures.

See Richard A. Stasewich versus Commissioner, TC Memo. 2001-30 and TC Memo. 1996-302.

PREPARATION PRECEDES POWER

Sarah Lesher had a couple of appalling encounters with the IRS

She didn't adequately prepare before claiming her losses.

From 1976 to 1980, she was employed at Yale University as a research associate and a computer programmer. Eventually she learned about a publisher of travel guides that needed information for a revised edition of an African travel guide. Sarah got in contact with the publisher and received information regarding the submission of articles for the travel guide.

Sarah travel to Africa in October 1980 and then to Israel in January 1981. While in Israel, ostensibly to gather information for her writing activities, the Weizmann Institute employed her as a computer programmer. She bought a typewriter and wrote a draft of a fictional work based upon her adventures in Africa and Israel. However, she apparently didn't keep any type of business or accounting records of her writing activities. Nope, Sarah thought she could get by without making any debits or credits or keeping any other kind of financial or non-financial records.

As writers anxious to deduct our costs in writing and researching, we need to pay attention to Sarah's case as an example of how we might do things better than she did.

In September 1981, Sarah left Israel for Europe and their return to the United States at the end of November. During 1981 she incurred a total of $9,847.13 in expenses connected with her travels. She deducted it on her Schedule C of her Form 1040 for 1981. Once again in 1982, Sarah traveled to Africa, possibly for research and gathering material for the travel guide she had found out about earlier. She resumed working as a computer programmer there.

But apparently Sarah lacked experience writing any type of literary work prior to her trip. She hadn't published or sold anything and didn't sell or publish anything she wrote with respect to her travels by the time she got to the Tax Court trial. And by then she still hadn't engaged a literary agent to help her publish her work --- the Tax Court judge clearly didn't know how difficult it is to get a literary agent. It apparently didn't need one to publish its opinions on Sarah's cases.

Sarah didn't ever show the court that she had traveled to Africa, Israel, or Europe primarily to write, or that she had remained in Israel in 1981 to author literary works that could make her money. The court ended up saying that Sarah had used her fiction manuscript as a pretext to claim her travel as a tax deduction. Essentially, the court said that Sarah's fiction was a fiction.

Sarah actually introduced several hundred exhibits, including a copy of the draft of her novel. The submissions included correspondence and information concerning the accomplishments of her ancestors, her friends, and her acquaintances. It detailed her personal life, her activities for many years before and after the years in issue, and it even gave the backgrounds of various authors. Nonetheless, the court said Sarah had used her draft novel as window dressing to support her claims to deduct travel expenses.

Plan, plan, plan on it.

Almost everybody wants to write, don't they? Doesn't just about everybody think they could write a novel? Or a memoir? Or some kind of nonfiction book on their expertise

And I suppose it's true that everybody could write a book on something. Not that it would sell or that anyone would be interested in it. It's easy to dream about doing it, but it's hard to make a plan and then live by it and get it done. For a long time before I retired I thought I could write a book. It all started when my wife's cousin left her husband. It's her fault.

Bless her.

Betty (names have been changed for the standard reason given) left my fraternity buddy, Bob, who had become her husband for a polygamist. They had three kids by then and she planned to take them with her too. I felt so badly for Bob, who I could tell loved his wife and his children more than anything.

It was too difficult to wrap my mind around, so after my wife and I got over spying on her with the guy, I decided to write a story about it. It all eventually transformed itself into a story about some Catholic gal from the Midwest who left her spouse for a Western polygamist. So for me writing a novel started out quite haphazardly . . . unplanned. From that initial beginning, I started getting more and more organized and making more and more plans.

Anyone who wants to make their writing business better needs a plan. And such a plan shouldn't be nebulous. It should be written. It also ought to be malleable, dynamic, and able to adapt to the situation.

The United States Small Business Administration has a section on making business plans. It is also viable to search Google to find plans for writers and freelancers.

Your business plan and the Internal Revenue Code (IRC) will have something in common. Every time you reread your plan, just like the Congress reading the IRC, you'll find something you want to revise. Something you think you can make better. Something that will increase the chances that you will succeed and be able to make money in your writing activity. Your business plan should be a work in process, a series of actions, with changes when needed to bring about results.

Plan on it.

HOW MANY YEARS

Many writers who have written for quite a while but haven't had much success at making a profit ask me how long they have before they must make a profit. Most of them have heard of the presumptive rule that if you make a profit a couple of years out of five you're home free. Almost everybody that's a novice misunderstands the presumptive rule. They seem to believe that it's an absolute rule. That unless you make a profit two of five years, you're out of luck. But it's not. It says nothing about how long you have to make a profit to have a valid profit motive. There is no absolute rule to that effect. The presumptive rule just says that if you have a profit two of five years, IRS will assume you have a profit motive.

So how long do you have? Far be it from me to say with exactitude. That is not the nature of taxation or of law, for that matter.

John Ellsworth had losses for thirteen years. Big losses. They ranged from over $21,000 to over $74,000. They probably averaged around $55,000 per year. He wasn't a writer, though. He was a cattle breeder. And it wasn't as though he didn't have revenue from his activity. Beginning with the third year, he had substantial gross profit. It's just that his operating expenses above and beyond the costs of purchasing cattle exceeded his gross profit.

Another crucial factor in Ellsworth's case is that he was getting back into cattle breeding after having been successful in it in his earlier life. He was quite old --- I believe 65 --- when he entered into this thirteen-year stint of substantial losses. The court was convinced that it takes about 10 to 15 years to develop a breeding herd with the superior strain and of substantial commercial value. They were satisfied that Ellsworth devoted sufficient time and effort to the enterprise to conclude that it wasn't some lark. You don't do all that work --- even though he employed 12 full-time employees to do all of the heavy lifting --- as a hobby.

How many years does it take? Your guess is as good as mine. It all depends. It depends on whether you can convince the court of three things:

• You conducted your activity in a businesslike way
  
• You had sufficient expertise in your activity and worked at gaining more expertise
  
• You worked at your activity regularly and sufficiently

SCHEDULE C

It's a crazy world. Tell your granddaughter about sleeping beauty and she asks if sleeping beauty had a trust. "Can she avoid death taxes?" she wants to know. And your grandson, he is no better. When you mention a like-kind exchange he knows you're not talking about some transformation, like Clark Kent into Superman. He wants to see the two properties.

Taxes pervade our lives. Income taxes have been with us since they were initiated to pay for the Civil War. Ever since then, they've been utilized for all kinds of wars and social situations. They aren't going away anytime soon. The basic structure has stayed consistent over time and no matter how often people, including the best of our statesmen, suggest a different tack to take with respect to taxation --- whether it's value-added taxes or some other scheme --- the fundamental foundation remains in place.
All income is taxable from whatever source derived. It is called gross income. The only way you get out of being taxed on income is if there is some legislative grace that has been enacted to do so. And I guess that is gross.

If you are in a trade or business --- or you think you are --- the part of the tax return that should interest you is Schedule C. You ought to become acquainted with it.

MAKE THINGS HAPPEN

Businessmen have been known to boast that they don't pay any taxes because they utilize an aggressive taxman that takes advantage of every loophole known to mankind. One joke had an individual saying that he didn't pay taxes anymore, that KPMG did his tax return, and he was getting a $4 billion tax refund. Well, we know what happened with KPMG, don't we?

If you want to utilize the graces granted you under the Internal Revenue Code, it's a good idea to prepare and to become an expert or to consultant someone who is. Too many taxpayers rely on complicated schemes that don't have real substance. They often pay large fees to promoters thinking that they can get tax relief when their own honest effort could have given them the breaks they sought and paid for.

The income tax regulations say in technical, cumbersome, and boring language:

Preparation for the activity [writing] by extensive study of its accepted business, economic, and scientific practices, or consultation with those with those who are expert therein, may indicate that the taxpayer has a profit motive where the taxpayer carries on the activity in accordance with such practices.

So if you want benefits, hit the books and consult the experts. Not only an expert but perhaps a range of experts, covering all of the aspects of your niche. Then implement what the sages say that it takes to succeed in your writing nook. If one of the experts advises you to try something that doesn't work, study some more and consult further and try another sage's idea

You've got to make things happen!

GET CRACKING

You might want to figure out how to make money from your writing activity. Try to have a profit. I know there are a lot of expenses. The cost of belonging to the League of Utah Writers or to some other writing association or group. The cost of classes you might take at the college or university or online. The fees you might pay to attend a writer's conference or workshop. The costs of traveling here and there. The research materials you purchase. Paper. Ink. It all adds up, and for you to have a profit you have to have revenue that exceeds the sum total of all your expenses. And to have revenue you have to have something to sell. What do you have to sell? Your good looks? If yours are like mine, forget it.

Every writer should make a written plan setting forth how they plan to make a profit from their writing. Do you have one? Get one. Follow it and revise it, as necessary. You have to revamp your plan and tell you make some money. If you keep on doing the same old thing you will usually get the same old results. If you keep writing the same old material and it gets rejected, do you keep on writing the same old material? Or do you change it? You change it, of course. You have to keep on revamping your plan until your make money or decide that you can't make money by writing, that it's not your thing.

SEDGWICK SLICK

Being a smart aleck with the IRS won't work out quite like it did for Mr. Sedgwick Slick, the phantom of folklore. Sedgwick, a handsome young man, appeared for his IRS audit with his buddy, Barney. Introductions proceeded. Alears introduced herself as the auditor.

After reviewing Sedgwick's records and considering information received from an informant, Alears confronted the good-looking Sedgwick. "Hmmm... Mr. Slick, I'm sorry, but it's plain to me that you're living well beyond the income you've reported on your return. Looks to me like you owe at least four grand in additional taxes for the income you have omitted."

Sedgwick answered, "Please, call me Sedgwick. Gambling's my game. I never lose when I make a bet. Let's say I had a good year."

Alears gave Sedgwick a skeptical stare.

"I see you doubt me," said Sedgwick. "I'll show you, if you want."

Alears asked, "What's on your mind?" She was, after all, an auditor, curious and inquisitive by nature.

Sedgwick smiled broadly at Barney, and then told Alears, "I'll wager 2,000 bucks against what you say that I owe that I can bite my own eye."

Alears wondered what the catch was, but said, "That's not possible. You're on." If she lost, she could adjust her report even though it wouldn't be right.

Sedgwick Slick removed a glass eye, slipped it into his mouth, and parted his lips, revealing the eyeball resting between his teeth.

Alears swore under her breath.

"Double or nothing?" Sedgwick said. "I'll bet I can do the same thing with my other eye."

Clearly, Sedgwick Slick wasn't blind. Alears needed to get out of this predicament. "You're on," she said, deciding that such a feat was impossible.

Sedgwick popped the artificial eye back into its socket. Then he removed a set of dentures, taking them in both of his hands, and manipulating them to nibble at his seeing eye.

Alears almost swallowed her own tongue. Now she was in real trouble. This whole thing had put her job at risk, and she felt horrible about her ethical lapses. She felt sick to her stomach.

"Okay, okay," Sedgwick said. "I see that I've upset you. I didn't want to do that. I'll go double or nothing with you again. This time I'll bet you $1,000 I can stand here" --- he slapped her desktop --- "and take a whiz into your waste paper basket over there by the door and never get a drop anywhere in between."

Alears had no idea what to do. She analyzed the situation as only an IRS auditor could. Her job was at risk. This crook was about to get away without paying his taxes. And there was no way on earth Sedgwick Slick could pull this one off.

"Okay," she said. At the very worst, she figured, if someone noticed the spectacle she could claim Sedgwick Slick was entirely insane. People audited by the IRS often acted in very strange and crazy ways.

So Sedgwick jumped onto her desk, quickly aimed, and let loose. He utterly missed, getting it all over. Sedgwick grinned.

Alears smiled, too. Thank goodness, she thought. Then she noticed Sedgwick's friend, Barney. He had turned green and looked ready to vomit.

"You okay?" Alears asked.

"No," Barney said. "Before we got here, I made a bet with Sedge. He bet me $20,000 that he could take a tinkle on your desk and you'd be happy about it!"

ALEARS AGOG

Alears Agog is a creation of my fantasy. I used her in my tax book, Making Expression Less Taxing, a Freelancer's Tax Resource. She is what is known as a tax auditor at the Internal Revenue Service. Now, I'm not certain that's the terminology they still use for tax auditors today, because I've been retired for a couple of years.

I was with the Internal Revenue Service for over thirty years, and that is the terminology we used those years for people who audited individuals and small businesses in the offices of the Internal Revenue Service as opposed to audits conducted at taxpayers' places of business or residence. (The people who did the field audits were called revenue agents.)

Of course, during the term of George W. Bush, a lot of traditions went by the wayside.

I worked for a few years as a tax auditor myself, from about 1974 to 1979.

I chose Alears's name for a particular reason. Successful tax auditors are incredible listeners. They listen to what taxpayers say to them and take voluminous notes. They are all ears. Their ears are open, agog! I know that agog usually pertains to vision. Eyes, not ears, are usually said to be agog. Isn't that correct? Maybe not. In any event, agog means eager. A good tax auditor is eager. The auditor is full of keen anticipation. Why?

I guess there are a few reasons. They are trained to catch mistakes and errors. Isn't it fun to find out the mistakes of others and be able to do something about it? Well, for many people there is. Beyond that, they are always looking for crooks. There is a sense of self-righteousness and the same level of enthusiasm law enforcement workers often have in catching criminals. Perhaps, for some there is a degree of maliciousness in their machinations. However, my experience is that most tax auditors are simply conscientious workers trying to do the best work they can for their employer with a keen sense that they are civil servants.

Every taxpayer who claims tax benefits against their income must consider what their chances of being audited are. Why is that? Because not every claim you might make as a taxpayer comes clearly within the terms

Let me give an illustration. I spoke at a writers' workshop sometime ago. One of the blooming authors there asked me if he could deduct the books he purchased to read for both research and/or to make himself more proficient as a writer, following the admonitions of many experts on writing that he should read a lot. In other words, not all of the books that he had purchased were on writing or directly related to research for a project he might be working on. They might be just the normal books, magazines, and newspapers that anybody else might read just because they were popular

Could he deduct their costs? What do you think?

If he got audited, a good auditor like Alears Agog probably would question his deduction of some or all of those purchases. They're a couple of reasons, but the main one probably would be that the law doesn't allow an individual to deduct personal living expenses. It does allow a taxpayer to deduct ordinary and necessary business expenses. There is a good argument for saying the cost of the books is a personal expense and a good argument for saying the cost of the books is an ordinary and necessary business expense. There is ambiguity.

The subject writer's situation differs from somebody that works as the proprietor of a restaurant when it comes to deducting the costs of books. There is less ambiguity with respect to the restaurant operator and if such individual attempts to deduct the cost of his John Grisham books he or she will probably fail if audited. On the other hand, if a writer deducts deduct the cost of his books written by John Grisham he or she may well succeed. Or fail.

THE BORING ACCOUNTANT

Accountants and CPAs are often characterized as misers. A better word for them is perhaps frugal. But there're stories. For example, there's the story about the refreshment stand at the beach

A customer walks up and orders a cold one at the refreshment stand. The vendor working there asks if the customer wants to try a new brew made locally, saying it'll only cost him a buck instead of the usual three bucks for a cold one. So the customer looks around and notices several people with the new brew, except for one guy who it appears has only a glass of water, no ice, not even a lemon-slice. The taste-testers seem all happy and contented with their refreshment, while the guy with the water seems quite dour.

So the new customer decides to try out the new brew, and he really likes it, and he goes back for another one. As he stands there waiting he asks the vendor, "Do you know what's up with that guy over there? He seems so sullen, and I notice he doesn't have one of these new brews like everybody else does."

The vendor smiles and shakes his head. "That Skippy Flint. He's a CPA --- actually does my taxes for me --- and he has a reputation as a great accountant. You get audited by the IRS, you want to Skippy Flint with you. But he knows that at five I offer these new brews for free for an hour, and so he's waiting until then."

While it's definitely a stereotype to characterize CPAs and accountants like the story does --- I've known some of these types to be very exciting individuals, like Sid who rode his bike across the United States from coast to coast or David in Idaho who grew marijuana in his house --- it is probably a good idea to try in your writing or artistic endeavor to utilize great care in keeping your books and records and being thrifty.

A BUSINESS PLAN

A few postings ago I mentioned Burnett Outten, the cold-fusion guy. What a hoot! Bernie's circumstances were "singular." No doubt about it

Mistakes can cost you taxes and penalties. It's like a conservative president who tries to deduct right-to-lifers as some kind of tax grace. It just ain't happening. Not anymore, at least. As a nation, we'll probably have to write off the losses of Iraq, big time, but it won't benefit you. No, it will cost you. And me. Everyone. The only thing to do is to learn from the mistake. To utilize it to be smarter and do better in the future. The same is true in your activity as a writer or an artisan.

You need a written plan. Your plan should be to make money, to profit from your expression, whether your expression is in words as a writer or in art or in some other medium. Make some money! The cliché says that the best laid plans of mice and men often go awry. Your plan should be dynamic, not static. It should change, not with the wind, but based upon your operating results; that is, it should change with what happened when you followed your plan but it didn't result in a profit or in an adequate profit to suit you

Your new plan should supplant your old one only if you're convinced that something new can do better than what you were doing before. A plan needs to involve both finances and operations. It should be influenced by the opinion of experts who have earned profits in similar businesses and activities. You should be changing things for efficiency's sake, for the sake of reaching your market, because you think you can sell a new product for greater amount with less effort. Plan and revamp. Keep going until you make money or decide you can't make it. If you keep losing money it becomes increasingly difficult to sell the idea that you are in a trade or business. At some point it becomes almost impossible to convince the IRS cynics.

When I speak to writers --- I haven't had any engagements to speak to artisans yet --- I sometimes feel like the schoolboy being shaken down by bullies in front of the school who want my lunch money. I don't have any to give them. I have no advice about the art of writing; I am not qualified to help them. I don't feel confident that I am at that level as a writer that I should be giving advice about writing above and beyond what I give in my critiquing group where the people know and accept me.

Anyway, it's like I'm standing there with my pockets turned inside out and I have to say that all my money is in taxation know-how.

Every writer must look in the mirror. They must face themselves truthfully and honestly there. Just like Snow White's mother-in-law --- Was it Snow White or Sleeping Beauty? My memory is so bad. --- they must assess their beauty in terms of their craft in the mirror. And what they see there might --- probably will --- let them know that someone else in the realm is looking better, sometimes much better, than they are. Now, they might not like that, denying it for a period of time and then grousing about it and trying to take revenge or manipulate the matter. They might even tell the mirror it has no room to talk, that they've seen better looking mirrors, but eventually they must, at the risk of the rest of the fairytale and how it turned out, accept their place in the writing craft. They will have to work harder.

Not only must writers accept their place in the writing craft and the fact that they might have to work harder, but they must also face up to the notion that they have to, if they are serious about writing as a profession, conduct their writing as a business. Not all businesses make money. Especially during the startup period.

I often wonder about the early years of successful writers, people like Steven King or the latest phenomenon, Stephanie Meyer. During the period before their careers as writers took off, they must have suffered losses . I wonder how many of them claimed losses relative to their writing on their income tax returns during those early years before the profits started coming in.

Anyway, in future postings I will be telling about a few writers that claimed losses in their early years as they began writing and then eventually got audited by the IRS.

Taxation isn't the most exciting topic. Most people involved in it have accountant-like personalities, often they are stereotyped as introverts. It reminds me of the question: how do you identify an extroverted accountant? Answer: When he talks to you he looks at your shoes instead of his own.

Incidentally, his shoes are spit-polished. Or not.

BURNETT OUTTEN

Figuring out if writers and artisans have a trade or business and can benefit from corresponding tax graces to reduce income taxes is often a mystery. There is often, especially at the outset of an activity, ambiguity as to whether or not sufficient evidence exists to say that the activity is profit-motivated and, therefore, a trade or business.

Some years ago --- probably before many of you were born or can remember --- there was a cold-fusion fiasco. Some guy at a University of Utah thought he had figured out how he could produce lots of energy cheaply without a much energy using a process they termed cold fusion. It turned out a fluke, but at the time it was fashionable to try and figure out how cold fusion might work.

May I introduce Burnett Outten, Jr.? (I wish I had met him in person; his story is so intriguing.)

An agent or an auditor at the Internal Revenue Service, it appears, conducted an audit subsequent to Mr. Outten's failure to file his income tax returns from 1972 to 1979. Of course the IRS official proposed that Mr. Outten owed significant additional taxes and, of course, penalties. Mr. Outten disagreed. Surprise, surprise.

Burnett, it seems, owned an interest in a metals manufacturing concern of sorts. When he met with the IRS and then again when he found himself in court before a United States Tax Court judge, he claimed that the company conducted atomic energy research. Not only that, he claimed that the company had succeeded in producing cold fusion in such experimentation. However, he admitted that he, as chief researcher and experimenter (as in "only" researcher and experimenter), hadn't realized that the nuclear fusion had occurred in a 1951 experiment until fully ten years later, in 1961. He claimed, also, that the company repeated the 1951 experiment with success again in 1971. Burnett, however, never explained why such a valuable process was not patented.

Burnett theorized that the world was created by cold fusion, a juicy and tantalizing religious twist to the story. The documents he filed with the court went on and on about experimentation coupled with religious freedom, including a political history from the toime of Thomas Jefferson to Ronald Reagan, various citations from the Bible, and reports from the Atomic Energy Commission.

You might have guessed it by now, but Burnett argued that he shouldn't owe any taxes because, despite his alleged fantastic discovery, his company hadn't made any money from it yet. In fact, it had big losses (read that in the millions of dollars) that would offset any other income he might have had. In other words, he wanted to exercise the grace granted under section 162 of the Internal Revenue Code to escape taxation

Attorneys for the government argued that there were a plethora of problems with Burnett's arguments, allegations and protestations. The Tax Court judge, it seems, focused on only one : profit motive. In essence, the judge said that the likelihood Burnett had a profit motive was about equivalent to the likelihood that he had discovered a viable cold fusion process.

The moral of the story for writers and artisans: even if your expressive product is along the lines of the fantastical, is science fiction or something experimental, new age or avant-garde, make certain that the way you conduct that activity and your recordkeeping is not. Make certain that that the business aspect is grounded in reality. Ask is this ordinary? Make certain it is necessary. More about that later.