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.