Friday, September 17, 2010

Silly Sarah

Consider Sarah Lesher, who had had a couple of appalling encounters with the IRS, partly because she didn’t adequately prepare.

From 1976 to 1980, Sarah worked for Yale as a research associate and computer programmer. When she learned of a publisher of travel guides in need of information for a revised edition of an African travel guide, she contacted the publisher and received information regarding the submission of articles.

Sarah traveled to Africa in October 1980 and then to Israel in January 1981. While in Israel, apparently to gather information for writing, the Weizmann Institute employed her as a computer programmer. During 1981 she bought a typewriter and wrote at least one draft of a fictional work based on her adventures while in Africa and Israel. She didn’t keep any type of business accounting records of her writing activities. Nope, Sarah thought she could get by without debits or credits or other financial or non-financial records.

My friend Doug, longing to deduct the costs of going to Vietnam to get photographs of unique motorcycle use to create a picture book, might want to pay attention to this case as an example of what not to do.

In September 1981, Sarah left Israel for Europe and then returned 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 this amount on Schedule C of her 1981 Federal income tax return.

Again in 1982, Sarah traveled to Africa, possibly for writing materials, and there resumed working as a computer programmer. In April 1983, she returned to the United States where she continued her education and again worked as a computer programmer.

Sarah lacked experience writing any type of literary work prior to her trip. Further, she didn’t publish or sell anything she wrote with respect to her travels before her Tax Court trial. By then she still hadn’t engaged a literary agent to help her to publish. (It doesn’t appear that the Tax Court knows how difficult it is to get a literary agent.)

Silly Sarah didn’t ever show the court that she had traveled to Africa, Israel, and Europe to write, or that she had remained in Israel in 1981 to author works that could make money. The court said that Sarah 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.

While Sarah introduced several hundred exhibits, including a copy of a draft of her novel—it makes one wonder how that impacted her copyright—correspondence and information concerning the accomplishments of her ancestors, friends, and acquaintances, her personal life, her activities for many years before and after the years in issue, and even the backgrounds of various authors, the court still said that Sarah used her draft novel as window-dressing to support claims for travel expense deductions.

“Preparation precedes power.” Remember that axiom. Prepare to be a better artisan and to address every IRS concern by studying your expression activity’s accepted business, economic, and scientific practices, or by consulting its experts.

Tuesday, August 31, 2010

Preparation and expertise.

An old story has a businessman boasting to his competitor, “Tax day is coming next week. Yep, good old April 15th—that particular day used to scare the pants off me. But you know what? I don't pay the tax man anymore. KPMG did my return this year. I'm getting a refund of $4 billion.”

Preparation and expertise. Let’s get a little more know-how under our belts, and not the type that the businessman boasts about in the gag. Too many taxpayers rely on complicated schemes without real substance and pay large fees to promoters to get tax relief when their own honest effort could give them the breaks they seek. Relevant income tax regulations say in their technical, cumbersome, and boring way that:
Preparation for the activity [in our case, an expression activity,] by extensive study of its accepted business, economic, and scientific practices, or consultation 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.
In other words, hit the books and ask the experts. Study a range of experts, covering all aspects of your niche in expression. Implement what the sages say it takes to succeed in your expressive nook. If an expert advised you to try something and it didn’t work, do more study and consulting and try another sage’s idea or one of your own. Make things happen.

Monday, August 23, 2010

To Facilitate a Means

Some years ago Bill Maher fantasized a tax return of repute, saying George W. Bush's tax returns were a bit different. He claimed the President wrote off the Christian Right as dependents, declared the 2000 election as a gift, and tried to claim the mileage he got from 9/11. Bill, of course, was joking around, fabricating. Don’t make your return that reports your expression activity a truth stranger than fiction, worthy of ridicule by taxing authorities. The Tax Court said:

The purpose of maintaining books and records is more than to memorialize for tax purposes the existence of the subject transactions; it is to facilitate a means of periodically determining profitability and analyzing expenses such that proper cost-saving measures might be implemented in a timely and efficient manner.

Sunday, August 22, 2010

Don’t muck things up

John R. McCarthy —I’ll call him Johnny—retired from Rocketdyne, Inc. He’d worked as a scientist and engineer for 35 years writing technical and scientific proposals. Thereafter, he still worked, but was self-employed, utilizing his prior experience.

On various Schedules C, Johnny listed his “principal business or profession” as writing, investing, job shopping, art, engineering, science, consulting, teaching, photography, and research. (A bit unfocused, eh?) Johnny stuck some royalties, interest income, and lecture fees characterized as business income on the Schedule C pertaining to writing. Despite asserting that he used those resources to pay for writing expenses, such income didn’t derive from any writing he had done. Johnny should have reported these royalties and fees as “other income” and the interest income on the interest-income line on his tax return.

The court said that Johnny’s expenses which truly related to writing couldn’t offset such income which didn’t come from writing. Everything Johnny did made it look like he was confused and undecided. To use a cliché, Johnny was a jack of all trades and a master of none. The expenses he listed on various Schedules C related to his writing activity all right. Writing was the only activity he really engaged in with regularity. Concluding that he should have reported everything on a single Schedule C pertaining only to writing, I’ll bet you’re not surprised to hear that the court concluded that he lacked a profit motive. He hadn’t generated any writing revenue. While aspects of his activity were managed in a businesslike manner, Johnny couldn’t explain how he expected to recoup his substantial losses. A sound, focused business plan and accurate and complete financial and non-financial records could have helped—both in making his business profitable and in convincing the IRS he had a “profit motive.”

Don’t muck things up. Forget trying to disguise income from other sources as income for expression activities. That’d be crazy. Keep records—business and non-business—that present operations clearly, completely, and succinctly. Remember the bard’s advice: brevity is the soul of wit. Mind your debits and credits if you use them. If not, don’t scrimp on accuracy, meticulousness, and using the data germane to and used in conjunction with a vibrant, viable and compelling business plan. Make it crystal clear that you have a plan to succeed as a writer—that your goals show that you plan to be as successful as J. K. Rowling or Dave Barry. If you’re convincing enough, you’ll never have to worry about convincing the IRS that you’ll recoup your losses.

Non-financial records should include databases of contacts, customers, and consultants, along with their pertinent information. If you’re a writer, you should keep track of the hours of your writing, researching, and editing. You should have a database to show details about your submissions, including the title of the work, where you submitted it, the date, follow-ups, responses, sales, etc.
One further thing: keep your expression activity records separate from personal records and other business records. Have separate expression activity credit cards, debit cards, checking and savings accounts, and accounts at your favorite vendors. If you have more than a single proprietorship, don’t ever intermingle them. Doing so may subject you to ridicule.

Wednesday, August 18, 2010

Integrate Financial and Non-financial Records into Your Dynamic Business Plan

Sloppy books and jumbled records can point to a hobby. In one case the Tax Court said, “The record . . . is vague and confusing. There is no clear picture of the exact nature of [the taxpayer]'s recording activities. Nor is there a clear picture of how and when, if ever, these activities are going to result in a profit.” The court goes on to say:

…the record was incomplete, without evidence of an organized, businesslike attempt by [the taxpayer] to engage in an activity for profit. [He] did not introduce evidence of long-range planning or of organized recordkeeping. Nor did he introduce evidence to prove that he had regular customers and receipts— normal attributes of a profit-making enterprise.
Moreover, in many instances the evidence which appears in the record tends to indicate that [the taxpayer]'s activities were motivated by pleasure rather than by a desire to make a profit. At no time through the end of the taxable year in question did [taxpayer] hold himself out to the general public as being engaged in business. Indeed, [the taxpayer] did not even carry on his recording activities during the year in question.
So be certain that your records—financial and non-financial—present a clear picture and the exact nature of your expression activity. Integrate financial and non-financial records into your dynamic business plan.

Monday, August 9, 2010

Debits, Credits, and Other Nincompoopery

A late-night talk-show host some years ago now quipped about an our-of control accounting firm debacle, “If your accountant is Arthur Andersen . . . today is the last day you could have your tax documents shredded by April 15th.”

Let’s face it; the accounting profession has committed sufficient buffoonery ove the years to rival the stench of Yellowstone’s sulfur pots. That’s not to say that accounting is suspect. Yet accountants can be. Watch out for such fatheads.

Many admit that accounting is a yawner, that accountants are . . . well, lackluster. Make no mistake though, for your expression activity to be a trade or business you need to pay attention to its basic accounting. That doesn’t necessarily mean that you have to know debits and credits or hire a high-falutin’ CPA. If you choose a CPA or other tax professional, make certain it’s someone you can trust. A double-entry system of accounting isn’t necessary, although it certainly won’t hurt if it’s done correctly. The key is accuracy, meticulousness, and using the data in conjunction with a vibrant, viable business plan. Regulations and court cases point out that those who maintain good books and records for their activities are more likely to have “intent to profit” and thereby escape the “hobby” label even when they have successive losses.

Friday, August 6, 2010

Plan, Pursue the Plan, Adapt

The Court in Stasewich's new case (Richard A. Stasewich v. Commissioner, T.C. Memo.2001-30. The earlier case was Stasewich v. Commissioner, T.C. Memo.1996-302.) said:

"[Richie] 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 [Richie] conducted his artist activity lead to the conclusion that this was not an activity engaged in for profit."

Make a business plan and make it live. Your new business should change and develop just as a new baby grows and matures.

Tuesday, August 3, 2010

Richard Stasewich (I’ll call him Richie) of Chicago attended Northern Illinois University between 1971 and 1977, majoring in art and minoring in accounting. Richie didn’t graduate. By 1978 he was registered as a CPA and by 1983 Illinois had licensed him as a public accountant. Between 1978 and 1984 Richie worked in various positions utilizing his accounting background.

From 1992 to 1995 Richie operated both his accounting and artistic activities out of the building where he worked and lived. Beginning in 1984, he treated his artist and accounting activities as sole proprietorships for Federal income tax purposes. He reported net profits and losses for his two separate Schedule C activities as follows:

Richie’s income from artist activities without expenses for 1992 to 1995 was only $770, $320, $266, and $357, respectively. Needless to say, he didn’t support himself from this expression activity, and his accounting-activity income came in handy for his sustenance. Not only did he support himself with such work, but he kept good financial records and was able to show the IRS substantiation for all of the expenses he claimed on his returns.

Richie had a Certificate of Registration from Illinois that permitted him to engage in business, selling tangible personal property at retail. He filed state sales and use tax returns and completed Forms W-2 for the art students he employed.

What Richie didn’t keep were records of a budget or financial projections for his artist activity, or records of costs he might incur in attempting to develop his artist activity. That is, he didn’t plan well.

At trial Richie explained that before 1992 he had decided to create a commercially viable product from nude drawings. He tried fashion illustrations and spent a lot of money on materials and props, but never secured a large client and never earned anything from it. Around 1992, his artist activities changed from nude drawings and fashion illustrations to portraitures and installation art displays. For $1,200, he placed two advertisements in his local newspaper to solicit work as a commissioned artist of portraits. He painted two portraitures between 1992 and 1995 that generated about $850 in revenue. From 1992 to 1995 he created four displays of installation art consisting of peppers, dolls, pumpkins, and cucumbers. These he displayed in front of his residence. The exhibition of dolls received media attention, was the subject of two newspaper articles in 1994, and was mentioned in another newspaper article in 1995. (I guess journalists passed on reporting about the exhibitions of peppers, pumpkins, and cucumbers.)

Richie's income from the installation displays totaled a measly $88.04 . . . of donations.

The IRS audited Richie first for 1988-1991. The dispute ended up in the Tax Court, where he lost. This didn’t deter Richie from claiming his expression activity losses from 1992-1995 and again taking the matter to court. We'll talk more about this in the next posting, too.

Saturday, July 31, 2010

. . . plan well and follow your plan . . .

To start a business, you need a business plan. A resource for the essential elements of a business plan can be found online at the United States Small Business Administration. Also, you might want to check for business planning ideas from writers' sites online .

A great business plan and the IRC (Internal Revenue Code) have something in common. Like a great classic, every time you reread it you find something new. This is not because, like a great classic, your business plan is timeless, but because it’s dynamic. It’s a work in process, a series of actions, changes, or functions bringing about a result. Plan on it.

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

Wednesday, July 28, 2010

Formulate a Plan

After I retired from a long, long career with the IRS. I wanted a change of pace. I still wanted to utilize skills and experience garnered over the thirty-four years I worked for the IRS as an Appeals Officer. Yet I wanted to go in a new direction, and make money doing it!

Like you, I’d dreamed of making my expression activities profitable. I had a long almost-written novel under my belt that my critiquing group seemed to like..My short stories had won a writing competition or two. I’d had some things published in the newspaper. Up until then, though, I'd been dabbling, puttering around, dreaming big—like most of you. Writing had been my hobby. Okay, how did I transform it into a business?

I can imagine you shouting at me: “Walt, after working that long for the federal government, especially for the IRS, your judgment and work ethic must be shot. Surely you can’t be serious about making money by writing. I advise you to buy a lottery ticket, sit back and relax with a cold drink, and forget writing to make a profit. It’s a pipe dream.”

Perhaps you’re right . . . about the lottery ticket. By now you should know I believe in true grit. So let’s move on.

First, I made my plan. Mine started as follows:


“Make expression less taxing” was my mission statement . . . at first. It changed as my business progressed. At the time it gave clarity to my plan while leaving room for imagination. Eventually I planned it would become “Make expression very profitable.”

This was a start-up. I’d begin when I retired from the IRS. I’d write books and articles to self-publish and them market myself, or sell them through conventional methods—utilizing agents, editors, publishers, etc. I’d participate in local writing societies and critiquing groups, hoping to gain feedback from those who read and write in order to hone my craft.

I’d write from home or wherever I happen to be in the course of my expression activity or my personal life. My business would entail travel and entertainment.

My primary marketing tool to begin with was to be a self-help book about making expression activities less taxing, thus paying less to the IRS and related state and local income tax authorities. I’d speak publicly. The value of my presentation would command the cost of travel and a speaker’s fee. I’d utilize speaking engagements and the sponsoring platforms to market my books.

I'd also do professional representations of taxpayers engaged in expression activities who have problems with the IRS.

Since my retirement pension would be less than my salary was when employed, my goal would be to profit from this new business sufficiently to make up the difference. After that I’d aim to net an amount equal to my pre-retirement wages. Subsequently, I’d steadily increase revenues, hoping eventually to make a generous income and gain a solid reputation that could command respect and attention in the publishing world.

Initial sources of revenue would be the sale of my book, Making Expression Less Taxing, and fees for speaking on the relationship of expression activities and taxation. I’d augment this revenue by representing clients with federal tax problems relevant to expression activities with the IRS.

I suggest you start formulating your own business plan like I did.

Tuesday, July 27, 2010

Planning to Exploit the Graces

John (see Ellsworth v. Commissioner, 21 T.C.M. 145, 150-51 (1962)) was 65 years old and had a plan. The attendant facts showed it’d take him 15 years to generate a profit. Yet the Tax Court said that a trade or business existed in his case because his purpose in “carrying on the activity” was to profit.

America was founded to avoid high taxation, right? Today avoiding high income taxes takes planning to exploit all of the graces. So it should be no surprise that you need to plan relative to your own expression activity. Remember, experience isn’t necessarily a requirement for having a trade or business. But a good plan is. So to answer further the question, “Is my expression activity a trade or business?” let’s look at the process of planning next.

Wednesday, July 21, 2010

Is My Expression Activity a Trade or Business?

Guess what? Federal income tax law and related regulations don’t define what “trade or business” means. Surprised? You shouldn’t be. I told you there was plenty of mystery in taxation. Ambiguity, it seems, is intentional. Some wit compared an income tax return to a girdle. You put the wrong figure in it and you can get pinched.

Tests to check if a trade or business exists stem mostly from court opinions (primarily from the United States Tax Court or from appeals made from those decisions ). Courts have developed two key definitional elements, one for “profit motive” and the other relating to the “scope” of the activities.

Finding out the motive is a key element in figuring out a mystery, right? A trade or business doesn’t exist unless a taxpayer “enters into and carries on” an activity with a good faith intention to make a profit or in the belief that a profit can be made from the activity. Money is the motive—bottom-line profit. That means you have cash left after all expenses are paid. Faith that an activity will generate a profit doesn’t need to be reasonable. However, simply hoping and wishing it will be profitable absent specific plans suggests that you lack good faith.

Remember the cold-fusion fiasco? The notion that oodles of cheap atomic energy could be produced cheaply and “coldly”? Too good to be true, right? Well, one Burnet Outten, Jr.—I’ll call him Bernie—representing himself without an attorney, took his tax controversy concerning cold fusion and graces relative to it to the U.S. Tax Court in 1984.

Bernie seemed a bit “unusual.”

He didn’t file federal tax returns from 1972 to 1979, for one thing. He had an interest in Western Metal Products Company (Western), a manufacturing concern. Besides manufacturing, according to Bernie, Western conducted atomic energy research. Yet Bernie was the only company participant in such research. Ostensibly, an experiment in 1951 resulted in nuclear fusion. Bernie, however, didn’t “realize” that nuclear fusion had occurred in 1951 until 1961, while doing further research. Bernie purported that Western repeated the 1951 experiment in 1971. Neither Bernie nor Western ever patented any such process.

Bernie believed that the world was created by cold fusion. He seized upon the alleged religious significance of the creation of the world by such process. His legal briefs contained extensive arguments about scientific experimentation and religious freedom. They explored history from Thomas Jefferson to Ronald Reagan and from the Bible to reports of the Atomic Energy Commission.

Over the years Bernie often attempted to inform scientists and government officials of his miraculous “discovery,” asserting that it was never duplicated. Some commentators expressed polite interest; others found it . . . well, a joke.

Neither Bernie nor Western received any filthy lucre, let alone profit, from said nuclear fusion “process.” No income relative to it was reported. Western’s income, if any, came only from manufacturing. Nonetheless, by 1978 Western established a $50,000,000 book value for this fusion “process.” On 1977 through 1979 tax returns, Western listed net operating losses of $100,000, $10,000,000, and $5,000,000, respectively. The preparer of the return described these losses as a “write-off of capitalized research work.” Bernie concluded that a grace was justified because government officials ignored him and his “discovery.” It was strange. Sort of like the President of the United States releasing his tax returns which listed the economy as a liability and write-off.

During the audit Bernie listed various actual expenditures—small amounts—that he made during the years involved. He gave the list to IRS. These included mostly expenses for his home office and for his move. IRS attorneys acknowledged that the expenditures were made by Bernie, but scoffed at them falling within any acceptable grace. The Tax Court concurred, saying that Western faced “a multitude of obstacles.” The court focused on just one: profit motive. It said that no income was generated nor was any likely to ever be generated from the fusion activity.

Well, let’s face it. Bernie’s circumstances were “singular.” His mistakes cost him more taxes. He was like a conservative president deducting right-to-lifers as dependency exemptions, accepting his election as a gift, and trying to write off the losses in Iraq. Nonetheless, something can be learned from Bernie’s case. As a man of religion once said, “If you make a mistake, all is not lost. You can always be used as a bad example.” So let’s use Bernie’s case as a bad example. It can teach us what not to do. I’ll summarize some points below and expand upon them in chapters to follow.

First and foremost, figure out how to make money from your expression activity. Have a profit. Bernie didn’t make any money from cold fusion. Make a written plan setting forth how you plan to make a profit from your expression activity. Follow it. If it doesn’t make money, change your plan so you think it will after the change. Keep following the plan and revamping until you make money or decide you can’t make money. If it comes to that, your expression activity becomes increasingly difficult to sell as a trade or business. Eventually, it becomes almost impossible to convince the cynics at IRS.

Second, keep complete and accurate records, both of a financial nature (you know, dollars and cents, checkbooks, receipts, debits and credits, etc.) and non-financial records (like submission databases, contracts, business plans, correspondence with agents, diaries or journals, etc.). From the opinion of the Tax Court in Outten v. Commissioner, it doesn’t appear that Bernie kept very good records of his activities, does it?

Make certain that your expression activity has substance. Don’t be naïve like Bernie was by boasting it hadn’t been duplicated when duplication was the very thing that may have given it some scientific credence. Know the ins and outs of your activity and know how to communicate them.

Another thing; don’t try to hide your expression activity results for tax purposes within some other, perhaps more viable enterprise on your tax return. For instance, it looks as if Bernie tried to make his cold fusion activity transparent by burying it in the Western partnership operations. If you write fiction part time and work as a lawyer most of the time, don’t bury the profit-and-loss statement of your fiction-writing activity within the profit-and-loss of your law practice. Doing so makes you look like a cheat and a ditz. Don’t do it. It’s not savvy. They are separate activities, for pity’s sake.

To be or not to be; that’s the question. To be a trade or business there has to be enough business activity and profit objective. Get them and you’re home free. Such are measured objectively . . . well, that’s what the laws and courts say, anyway. Tax shelters, for example, often have neither sufficient business activity nor profit objective. Many therefore receive no graces. To be certain, a trade or business can exist with no profits in the early years (and sometimes none are earned for many years and yet a court approves), provided there’s a prospective profit sufficient to cover the losses. You don’t have to expect that profits from your expression activity will come immediately or within a short time, but your aim to profit must be genuine. If challenged, you have to be able to persuade the IRS or a court. If you’ve stacked up $100,000 or more of losses over multiple years, you have to be able to convince the IRS (and if not the IRS, then a judge) that your expression activity will earn enough not only to make an annual profit but to recoup your prior losses.

Wednesday, July 14, 2010

Good News

Generally, individuals can deduct outlays made seeking income, whether in carrying on a trade or business or only conducting an activity for profit. The major “grace” connected with Doug’s writing activity—or for that matter with your expression activity—stems from IRC §162. Ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business are allowed as deductions or graces.

The meanings of “trade or business,” “ordinary and necessary,” and “carrying on” are all important. In a hierarchy of importance of these aspects for the freelancer of expression, the meanings of “carrying on” and “trade or business” exceed the importance of the meanings of “ordinary and necessary” because their scope is broader.

If expenditures aren’t made “carrying on” a “trade or business” the question of whether or not they are “ordinary and necessary” becomes moot. They can’t be deducted to create a loss that can be used to offset other income—related or unrelated to the freelancing income, or carried to other tax years to recoup or save taxes. On the other hand, if expenditures are made while carrying on a trade or business, they still must be ordinary and necessary. But that’s an expenditure by expenditure evaluation, almost always a barrier that is much narrower.

An anecdote tells of a taxpayer asking a revenue agent to cite the law requiring him to pay additional income taxes. Supposedly the taxpayer jests that the revenue agent will die of eye fatigue and confusion trying to find it in the code.

Well, I have news, bad and good. The bad news is that the taxpayer got it wrong. Almost invariably it works the other way around. The revenue agent generally worries only about the all-inclusive income provision (IRC §61). All income is taxable unless saved by some legislative grace. Taxpayers bear the burden of coming within the terms of some grace or other.

The good news? You don’t have to worry about arrows pointing every which way and not knowing how to find the way to go. I’ll show and tell you ways to bear that burden in the following postings. So don’t pout and say “It’s too much, I surrender.” Stick with me here and see if what I say won’t work for you.

Tuesday, July 13, 2010

Blood From A Turnip

Our prospective Vietnam traveler, Doug, who was mentioned in prior postings, works as an administrator for wages (“W-2” income ). His employer pays him what’s left over after withholding federal employment and withholding taxes, among other amounts. Law requires his employer to withhold and pay over taxes on behalf of Doug. Almost everyone is acquainted with working for wages and has complained about withholdings. It’s not that the government doesn’t trust us, but it’s a pay-as-you-go system. And of course, they don’t trust you.

So Doug has income. The critical question now, though, is whether Doug’s prospective costs in traveling to Vietnam to get pictures to use in a potential picture book relate to activities that generate his wages. The answer is no, the two activities don’t relate. At most his wage income facilitates Doug’s going, but that’s all. There’s no link between his administrative job and his potential trip to gather photographs. Any income related to a picture book is only speculative.

On the other hand, suppose Doug has previously written other things and sold them or won prize money for his writing. Maybe he uses those revenues to fund his trip. Now we begin to see a closer connection. Maybe Doug pitches his picture book idea to an agent or editor and he gets positive feedback, and he has a contract, implied or otherwise. His writing is an activity, separate and apart from administrating for an employer, and has a closer connection to his prospective picture book-making activity. So now, assuming Doug finances his trip to Vietnam from revenues from his writing activities, is he home free in deducting those expenses?

One of the IRS auditors who sent many taxpayers my way to appeal his extreme exactions (and extractions) of more tax had a morbid sense of humor. He’d say, “Invariably my taxpayer will pick the thing up and turn it over. You know, trying to figure it out. It looks sort of like a misshapen hourglass, don’t you think? And instead of sand it has that dark-red, almost purple, viscous fluid in it. The thing just sits there on my desk, across from me and close to them, while I go through their bank statements, receipts, and canceled checks. Taxpayers become bored. ‘What’s this?’ they eventually say, picking it up.”

“And what do you tell them?”

“Blood from a turnip.”

As you can imagine, timid taxpayers don’t laugh at such morbidity. Nevertheless, those engaged in expressive activities like you need to know that hidden traps can humor sinister auditors when all you want to do is to deduct the costs of creating a book design or a picture book trip.

Thursday, July 8, 2010

Grace? No, not that girl!

Faced with the immensity of the IRC --- the Internal Revenue Code---, it’s no wonder that tax consulting and preparation businesses thrive. Most productive people, especially those in business for themselves, rely on CPAs, enrolled agents, public accountants, attorneys, and other professional tax preparation businesses and firms (and some not-so-professional). Everybody knows what H&R Block and J.K. Harris firms do. Many have relied on firms like KPMG, perhaps to their everlasting chagrin.

The U.S. Legislature and the Administration, no matter what party runs the government, promise tax simplification. Without equivocating, they have “simplified” income taxes and related forms beyond understanding . . . especially for those unwilling or unable to spend time and attention—significant time and considerable attention. Where do you fit in relative to this scheme? Let me give some scope to Doug’s quandary—or yours. Our tax system is premised upon a simple notion: income. All income, from whatever source derived, is taxable (IRC §61 ). If you find money hidden in the workings of the old piano you plunked on as a girl when you visited Aunt Betty and that she bequeathed to you, such money is income to you. Not only is the money in the piano income, but so is the value of the piano. And if you trade your knowledge of graphic design to a friend, promising to help with a brochure in exchange for him moving your inherited piano, guess what? You’ve got it. The value of the exchange is income . . . to you and him. It’s the old cliché; they’ve got you coming and going.

“Whoa,” I hear you saying, “that doesn’t sound right. I don’t think my folks paid any tax when they inherited that money from Gramps.”

Well, that’s where “grace” comes into it—not your old girlfriend, Grace, but grace, the disposition to be generous or helpful; goodwill. No matter who’s running the government, they want to be seen as generous and helpful. To be seen that way, but not necessarily to be so, that is. So when there’s a hurricane and consequent flooding, elected officials wander out hoping to be seen as bighearted and taking control. (The judiciary is a little different; they want to be perceived as erudite, fair and just.) In any event, the legislature grants some generosities to be helpful with the tax system and the administration also puts its stamp on them, grudgingly or not. It’s often nothing more than a sophisticated exercise in social engineering. Grace is often granted to the rich and powerful, a special interest group, or to some “special” situation. It all must have some semblance of equity and fairness.

All income is taxable, but by grace allowances are made. One grace eliminates the value of that inherited piano from taxation. Freelancers like Doug or you or me have lots to consider. First, do we have any income? If not, it’s moot; it is, after all, an income tax. We don’t need graces with no income. But if we have income, it’s important to consider its source. Why? Well, the graces generally relate back to the source of the income. That piano’s value is not taxable because lawmakers decided inheritances wouldn’t be taxed.

How about the money hidden in that piano? What does its taxation depend upon? I hope you’re saying, “Whether or not the legislature granted a grace.” Well, in this case there is no grace. The windfall is taxable.

Wednesday, July 7, 2010

Dizziness, Nausea, Regurgitation, and Loss of Consciousness

The novice, new to a sustained expression activity, is reminiscent of the neophyte writer who enters an IRS taxpayer service site to get help with a federal tax question. In the foyer she sees a small sign: “Tax Help.” Above it is a much larger poster with myriads of arrows pointing in every conceivable direction. However, there’s no clue where any of the arrows go. Two other separate arrows on separate signs are clearly marked: “Audits” and “Collections.” Clearly they don’t involve “Tax Help” and also don’t point where anyone wants to go.

In this blog, I’ll make it clear where the crucial arrows go and how best to avoid or prepare for ones clearly labeled pointing toward audits and collections.

Now, a crucial question for you: do you have a business plan for your expression activity? If you want results, you must plan. A plan allows you to look ahead, allocate your wherewithal, concentrate on key points, and prepare for problems and opportunities. Planning is vital for operating a business, whether you’re just starting up, getting a new loan, or making or soliciting a new investment. Plans facilitate optimal growth and development.

If, at this stage, you’re still trying to figure out if you’re a writer, if you’re still just focused on that first novella, a third sculpture, or perhaps only your second book design, then by all means now is possibly not the time to read this book. On the other hand, if you begin to see the glimmer of possibilities of succeeding as an artisan of expression and getting significant tax benefits as you start up, then stay tuned.

Some wit coined a term, intaxication, used to describe the stupefaction caused by the Internal Revenue Code (or IRC, as it’s known in the profession—otherwise referred to by some snooty attorneys who look down on it as Title 26 of the United States Code ).

In the Fall of 2005, I worked every day with the IRC at my side—my version published in 2004 contained 9,390 pages—and five volumes of similarly sized Treasury Regulations, necessary to explain the IRC. That’s over 54,000 pages alone, none of it what could be described with a straight face as a “good read.” Not only that, but the text in the IRC volume was fifty-fifty size-eight and size-six fonts.

Immediately across the hall from my office resided a vast library of books containing further explications, opinions, and tangential laws related to the IRC, bless its little (and I mean tiny) heart.

A friend told me when she was small and her mom took her to the town library, she dreamed of reading every single book in it. Only the most sick-of-soul person dreams of reading all the volumes in that tax library situated across from my former office. Such would result in inebriant effects: dizziness, nausea, regurgitation, and loss of consciousness. I confess I’ve suffered the effects myself.

Sunday, June 27, 2010

Sticking With It

Most people read a mystery for the intrigue, to find out who did it and to figure things out as they go. It certainly doesn’t hurt if the mystery is masterfully written, with an elegance of expression, and is entertaining. In any case, readers don’t want the answers to a mystery all up front or there’s little reason to keep reading.

People enjoy art for similar reasons. The art they afford for themselves is acquired to enjoy its subtleties over the long haul. If finding out whether your expression activity can be less taxing isn’t mystery enough for you, doesn’t have adequate subtlety, and the knack of the telling isn’t captivating enough for you, please don’t stick with me. You’ll possibly be disappointed if you read on under those circumstances. Also, if you’re experienced in the business of expression, already making scads of money and are well established and skilled, maybe this advice isn’t for you either. (However, maybe you’ll enjoy comparing what you’ve done with what I suggest and pick up some pointers, too.) In any event, if you decide not to read it, maybe you know somebody on the cusp of great things that could benefit from it. Please pass it along.

On the other hand, after you’ve read all the postings, considered all the facts and circumstances and the applicable law in your situation, you’ll be able to figure things out. You’ll know that a lot of hard work is involved in any business of expression and it’ll make you a better manager and, perhaps, a better artisan. I’m telling you honestly, it’ll require patience and work, maybe both in the extreme. And if you don’t have the patience for it and aren’t committed to it, you possibly don’t have what it takes to succeed as a craftsman of expression anyway. Maybe this would be a waste of your time.

Saturday, June 26, 2010

Suck It Up

Perhaps you’re already saying about my last posting, “Walt, you’re rambling; it’s a simple question. Just give it to me straight, it can’t be that hard—can Doug go to Vietnam and deduct it? If you can’t answer that simple question right now, why should I even listen to you?”

Okay, that’s fair; I’ll give you an answer. Yes, he can. How’s that? Is that what you wanted to hear?

But the answer could also be “no” or “maybe.” You see, it depends. It’s as simple as that, and as difficult. Federal income taxes are complicated. If you think otherwise, you are naïve. Don’t be.

The answers that I intend to address here involving federal taxation focus on “expression activities,” whether your expression is made as a journalist, a painter, a book designer, woodworker, fiction writer, poet, or any other way you may express or intend to express yourself. They are based upon the premise that all of the facts and circumstances and applicable law have to be considered. I hear you groan. Suck it up.

This won't be some watered-down exposition intended to skim the surface, leaving you in the lurch if your tax benefits are challenged by the IRS. It won’t leave you scratching your head wondering what to do if a revenue agent or auditor alleges that you owe thousands of dollars more in taxes, interest, and perhaps even penalties. And it isn’t for anyone dabbling in an expression activity, sticking a toe in to see if the water is frigid or not. It’s for those who take the plunge. So be prepared.

Friday, June 18, 2010

Don’t be naïve like the anxious taxpayer who was visited by a revenue agent. The agent completed her audit and presented a proposal for a lot more taxes. It seems the taxpayer had claimed costs of a vacation trip for his entire family to Hawaii, arguing that he needed to personally experience snorkeling in order to achieve realism in his television drama Nowhere to Be Found. The agent evangelized as she watched the taxpayer’s eyes and mouth widen as he reviewed her proposal for more taxes and penalties. “You know, Mr. Taxpayer, it’s a great privilege to live and work in the USA,” she said. “Citizens have an obligation to pay their fair share. And we really expect you to pay with a smile.”

“Thank God,” said the taxpayer with a guffaw. “I thought you’d want cash.”

This blog will try to give you answers, the statistics, the possibilities, the strategies. Not only that, but I hope it will entertain you too, relieve your worry, and banish your anxiety by teaching you the best strategies for managing your freelancing business as you express yourself—making the process literally less taxing. Sit back and relax when the IRS calls. Change the IRS acronym from Internal Revenue Service (or as many taxpayers call it, the Infernal Revenue Service) to: I’m Really Sorry, IRS . . . but I don’t owe those taxes.

Wednesday, June 16, 2010

What Does It All Mean?

Such questions as were posed in yesterday's posting characterized the cases of myriad taxpayers who appeared before me during my career as what was once stiltedly called an “appellate conferee.” That title gave way to the simpler “appeals officer.” But what didn’t grow simpler during my career was the Internal Revenue Code. It has grown thicker in every conceivable dimension.

Well, while you’re thinking about Doug’s chances, think about this. On March 3, 2005, Peter Jennings wrapped up the night’s newscast by saying, “Finally here this evening, one very large tax bill. The government says it has never seen anything like it before. Walter Anderson, a multimillionaire businessman, appeared in a Washington, D.C. court today, accused of failing to pay more than $200 million in taxes. The government alleges that Mr. Anderson used several elaborate schemes to hide his considerable income. It's a lot of money.” Anyway, that’s $200,000,000 smackers of taxes, indeed a lot of money. Any normal person would ask himself: with government going after the likes of Walter Anderson and getting that large a return on their investment in resources, why would IRS operatives even care if Doug deducts the measly costs of his trip to Vietnam to get pictures depicting oversized loads on motorcycles?

On August 29, 2005, the IRS reported that the accounting firm KPMG LLP (KPMG) had admitted to criminal wrongdoing and agreed to pay $456 million in fines, restitution, and penalties as part of an agreement to defer prosecution of the firm. In addition to the agreement, nine individuals—including six former KPMG partners and the former deputy chairman of the firm—were headed for criminal prosecution in relation to the multibillion-dollar criminal tax fraud conspiracy. The fraud per the IRS and Justice Department related to the design, marketing, and implementation of fraudulent tax shelters.

Again, does it make any sense to worry about the IRS devoting resources to Doug’s crummy little Vietnam trip? Even if—shame on him—he takes his family with him and deducts their costs, too? Why should the IRS care about Doug when it can get the kind of return they have on KPMG? Or the return they possibly got on KPMG’s clients, who claimed billions of dollars in tax benefits from the fraudulent tax schemes and all owed the tax back plus interest and penalties? We’re talking about billions of dollars. What’s the risk to little old Doug of the IRS throwing its resources after him for deducting one lousy trip to Vietnam? Not much? A lot? Somewhere in the middle? And if the IRS does go after Doug, what’s the risk to him that the IRS will prevail? How much will it cost Doug? Does he risk serving jail time? And what about monetary fines or penalties? Is he at risk? What about his reputation? He is, after all, an aspiring author on the possible precipice of great things. Could the publicity help him?

All good questions. Many things for Doug to think about, to learn, to consider and ponder before he puts the costs of that trip on his profit-and-loss statement on a Schedule C and attaches it to his Form 1040, exposing it to the potential ravages of a dreaded IRS agent or auditor. And maybe, just maybe, those answers and many, many more important ones like them, both for Doug and for you, are just as important as finding a perfect simile or eliminating an unnecessary gerund, finishing the last chapter of your novel, entering that disquieting contrapposto or portrait in an art contest, or acquiring an agent to sell your work or a gallery to display your sculptures.

What does it mean to carry on the freelancing of expression in a businesslike manner? How does a person maintain a complete and accurate set of books? How important is it to consult advisors and have expertise? How much time and effort does a person need to expend in the actual conduct of freelancing? Does anybody care? Questions. Many pertinent and probing questions for every freelancer of expression.

Tuesday, June 15, 2010

Ben Franklin said, “In this world nothing can be said to be certain, except death and taxes.” The point is, you won’t live forever and you won’t escape taxation. It’s as simple as that. However, you might as well have some fun trying to escape all the taxes you can. I can help you do it.

Some writers find a way to exploit death in their writing before facing the Grim Reaper themselves. In this book I will provide freelancers of expression (writers and artisans) a way to do the same with respect to taxes. I am an expert in the field of taxation. (Note that I didn’t say tax law. If you need an expert in law, see an attorney.)

After a meeting of my writing group, two members were describing their vacation experiences. Eric had gone to India, and Doug had visited Vietnam. Another member and I lingered, asking questions and listening to stories and descriptions of places that were so different from home and contrasted so strongly with the American way.

While reminiscing about Vietnam, Doug explained that in situations where Americans would use SUVs and trucks to transport goods, the Vietnamese use motorcycles. “They tote outrageous objects on a single motorcycle,” he said. “I saw such extraordinary examples that I decided I needed to collect snapshots or else people back home wouldn’t believe me.” Such pictures ostensibly included a man on a motorcycle with a full-size mattress, a family of five, a man with a big fat pig, and two men in tandem on separate motorcycles carrying a fifty-foot, five-inch-diameter metal pipe between them.

Kelley, the other listening colleague, piped up. “Sounds like material for a wonderful picture book.” She enlarged upon the notion and explained the potential process, her entire demeanor optimistic of Doug’s prospects.

Well, enthusiasm grew like zucchini in Doug’s face. I saw him envisioning possibilities. “I need to go back to Vietnam and get more pictures,” he said. “And I have some other ideas, too.” Then, as if struck by a thunderbolt, he turned to me. “And I’d be able to write off the trip on my taxes, wouldn’t I, Walt?”

Doug’s wife hails from Vietnam. Doug was looking for a good old subsidy from Uncle Sam, probably not recognizing that it would be borne on the backs of other taxpayers, like you and me. Doug knows that the wake of my occupational ship includes a thirty-five-year stint with the IRS, twenty-six years of which involved hearing disgruntled taxpayers appeal actions of the auditors and collectors, whom taxpayers always seem to characterize as ‘overzealous.’

“I suppose I couldn’t take my family and have it be deductible,” Doug said hurriedly. Or was this seeming statement a question? Or a plea? And so a dialogue began: him asking, me trying to answer.

Well, what do you think? Can Doug deduct the costs of his upcoming trip to Vietnam? Should he? If so, could he deduct his family’s expenses as well? What are the chances Doug could prevail if audited?

Monday, June 14, 2010

The Aspiring Writer or Artisan or Freelancer

Every month—more or less—aspiring writers escape. They flee marital and parental responsibilities, leaving kids, parents, spouses, significant others, and even debilitated relatives behind for a few hours, maybe even escaping work by taking leave, or excusing themselves from a social obligation. All of this they do in order to go to a nearby bookstore, a library, a community center, or someone’s home to meet with peers in writing leagues, critiquing groups, associations, and organizations . . . so driven because they enjoy conveying themselves in words. They want to share and refine their expression.

If you are one such writer, this blog might be for you. If not, it’s probably not, unless you’re an artisan equally devoted to your medium.

This blog is for writers and artisans of expression, the plodding, diligent, have-to-be writers and artists of every ilk: fiction or nonfiction, sculpting or painting, technical or escapism, poetry or journalism, photography or graphic design. Yet it’s not for writers and artisans now supporting themselves entirely through their writing or artistry.

Some who get out in this manner to such meetings or to a show or exhibit each month more or less are published, or their works are shown or represented, and, possibly, they are “known.” Some are earning their entire support or supplementing their major sources of income by writing or by selling their talent or artwork. However, most attending such types of meetings are wannabes: they want to be published, they want to be exhibited, they want to be paid, and they want to be successful. They want to profit.

Amongst the tens of thousands of these wannabes are thousands on the cusp of moving from wannabe to winner. Or perhaps they’ve been a winner and fallen off the podium but are back on the cusp of winning. This blog is written for those on the cusp. It will help teach them strategies to succeed and, in doing so, make their expression activities less taxing. It will show how to avoid an assessment from the IRS, claiming your activity is a hobby. It will show you how to mitigate mistakes in operations that may get you in trouble with the IRS.

Saturday, February 27, 2010

Are you an employee or self-employed?

Here is a good case to read if you wonder whether or not you are an employee or are self-employed. It was of particular interest to me since the company that was alleged to have been the employer is located in my state.


Why do people do stuff like this? Making frivolous and stupid arguments that have no merit and suggest that they don't like living in the United States or contributing to its society. My heart goes out for them in their delusion and I only wish they could see the error of their ways.

By selectively analyzing statutes out of context, petitioner has reached the conclusion that petitioners' wages received for 2005 and 2006 do not constitute taxable income. Petitioner has followed in the footsteps of numerous others who have unsuccessfully attempted to find a way to avoid paying Federal income tax. We find petitioner's arguments to be wholly without merit and not worthy of further analysis. For example, it has been explained that "Compensation for labor or services, paid in the form of wages or salary, has been universally, held by the courts of this republic to be income, subject to the income tax laws currently applicable."

Saturday, January 9, 2010

Why Are People So Greedy?

While working for her husband’s dentistry practice, Karen Cavaretta billed insurance companies for work he hadn’t done. Why? Didn't she have enough, living as the wife of a dentist who made good money? I guess not.

She pled guilty to fraud charges, he then repaid the money, and they deducted the repayments as his business expenses. IRS didn't think the repayment should be a business expense.