Saturday, March 7, 2009


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:


Artist Activity

Accounting Activity















































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.

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