Thursday, January 1, 2009


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.


  1. Old Burnie is still with us awaiting the end of the world. Fortunately at 94 he has forgotten about that. No money has been made to date.

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