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.