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.

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.

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.

Start-up Expenses, Office-in-the-Home, and More

JOHN Y. DING faced the IRS in Tax Court relative to what they claimed were his "business expenses." He claimed a bunch of expenses relative to his employment and a prospective business he was trying to get off the ground. It results in an interesting discussion and analysis of various matters including start-up expenses versus business expenses, rules governing an office in the home, and documentation, including the application of the Cohen rule.

Education Expenses --- Are They Deductible?

This case gives a good review of applicable law:
LORI A. SINGLETON-CLARKE vs COMMISSIONER OF INTERNAL REVENUE

It involves a RN who went back to school to become more effective in her then-present duties. She realized that nursing had evolved greatly in the 24 years since she earned her bachelor’s degree, and she felt disadvantaged working with highly educated doctors.

Office in the Home

Most writers I know plan to do their writing, at least most of it, at home. So I guess if you consider your writing activity a business, the temptation is to deduct every household expense you can conceive of as a business expense. After all, you work at home.

But you need to be careful and be aware of the rules. Remember, tax law distinguishes between what is personal and what is business. Generally, rent, mortgage payments, repairs on a residence and the like are not deductible. They are considered personal living expenses. You have to have some place to live. In tax administration such expenses are usually personal.

In order to get a business deduction for the use of your home you must use part of it (1) exclusively and regularly as your principal place of business, as a place to meet or deal with patients, clients or customers in the normal course of your business, or in connection with your trade or business where there is a separate structure not attached to the home; or (2) on a regular basis for certain storage use such as inventory or product samples, as rental property, or as a home daycare facility.

Now, the assumption is that you're working as a proprietor, not as an employee of someone else. If you are an employee who receives a W-2, in order for you to claim a deduction relative to the use of your home you must be able to prove, in addition to the other things mentioned above and talked about below, that the use of your home is for the convenience of your employer and that the portion of the home so used is not rented by the employer.

Now let's talk about all of that. First, exclusivity. Note that. It means entirely. It means you don't use it for anything else. Supposedly, you don't eat there, cook there, or do your wash there. You write there. Now, I know there's going to be someone out there who is a freelance writer who specializes in writing articles about cooking and producing cookbooks or some such thing. And they are saying, what about me? My writing about cooking and producing cookbooks entails more than just putting words down on a piece of paper or in a computer. Okay. I can buy that. But it's more likely that you use whatever area you use for cooking as an adjunct to your writing also for personal purposes. Where do you cook your meals that you consume? Or that your family consumes? The more you look for exceptions to what "exclusive" means in this way, the more lack of clarity it has as to "exclusivity" and the more chance you have of having it questioned.

Regular use means that you use the area for your writing on a regular basis, not incidentally or occasionally. Regular versus incidental and occasional. That's the test; only regular use qualifies.

 

Gabriel the Comedian

In February, the United States Tax Court issued an opinion in the case of Gabriel J. Loup. Agents or auditors of the Internal Revenue Service had determined that Mr. Loup owed more taxes for his 2003 federal income tax return than he had reported or paid. The dispute revolved around his entitlement to claimed business expense deductions. IRS said he couldn't deduct expenses he had wanted to. Gabriel represented himself before the court; he didn't hire an attorney to represent him.

You have to be careful of the judge you get. In this case, Gabriel drew a judge named Wherry. Now, that has to give you pause and make you wary, doesn't it? Some might say it should be enough to let the case go and not argue it. Anyway, I suppose Gabriel didn't know he would draw that judge and decided to proceede anyway. Afterall, Gabriel aspired to a profession in comedy.

Yeah, Gabriel wanted to be a standup comedian and actor. He had some experience to tell the court about. As a matter of fact, in October 2002, he had signed a contract with the Morgan Agency for a one-year period. The agency would act as Gabriel's agent for some television commercials. Gabriel also had a regular job. He was licensed as an intensive care unit nurse and worked as a pharmaceutical company representative.

Gabriel said he became a member of the 9 Layer Dipz, a sketch comedy group, in 2002 or earlier. The group, 9 Layer Dipz, wrote, produced, and directed its own comedy shows.

On his tax return for 2003, Gabriel claimed deductions on Schedule A that totaled $16,704, $12,811 of which were listed as "job expenses and most other miscellaneous deductions" which actually represented $13,761 of expenditures limited by two percent of Gab's reported adjusted gross income for the year. He detailed the expenses on an attachment, a Form 2106-EZ, used for deducting unreimbursed employee business expenses. He also stapled an explanry statement to his return.

The first thing that should be noted is that Gabriel's tax return preparer put these expenses on the Schedule A and then detailed them on the Form 2106-EZ erroneously; they should have gone on a Schedule C. The preparer, it appears, didn't know what he was doing.

During the trial, Gabriel and the IRS argued about whether his activity relative to comedy was a hobby or not. Of course the IRS said it was a hobby and Gabriel said it most certainly wasn't. Most of the evidence Gabriel submitted was intended to prove that the activity wasn't a hobby, but most of the evidence he had also postdated the year at issue, 2003. Eventually, IRS gave up on the hobby issue, conceding it, and argued that Gabriel wasn't in a business yet as a comedian so he couldn't deduct the expenses. It basically said that Gabriel had only done his comedian routines sporadically up to the end of that year and, therefore, it wasn't a going concern. It said he failed to substantiate the expenses and said many of them were personal and not business expenses.

Gabriel provided four advertisements for 9 Layer Dipz but none of them indicated which year they pertained to. Some of them did provide the day and month of a performace but not the year. Gabriel said at least one of them pertained to 2003, but the advertisement itself said it was going to happen on a particular day, a Wednesday or some such, and that particular day on that particular month in 2003 was not a Wednesday. Ah oh! Also, it became apparent that Gabriel had created a log that didn't coincide with anything else and appeared to be made up. Double ah oh!

The evidence indicated that all of Gabriel's performances with 9 Layer Dipz occurred in 2004 not 2003. Even the contract Gabriel had entered into in 2003 was not helpful because it didn't establish that he had ever performed as a comedian or actor in 2003. The court concluded Gabriel had not demonstrated active involvement in acting or comedy in 2003.

Gabriel lost his case because he didn't have his facts straight, didn't have his evidence properly lined up, wasn't entirely prepared, didn't have a business plan, and probably another few dozen reasons that could be listed. Preparation precedes power. If you're not prepared, don't expect to have any power to persuade a revenue agent or a tax auditor, or, for that matter, the United States Tax Court over agains what an agent of the IRS says.

Plan, plan, plan on it.

Almost everybody wants to write, don't they? Doesn't just about everybody think they could write a novel? Or a memoir? Or some kind of nonfiction book on their expertise

And I suppose it's true that everybody could write a book on something. Not that it would sell or that anyone would be interested in it. It's easy to dream about doing it, but it's hard to make a plan and then live by it and get it done. For a long time before I retired I thought I could write a book. It all started when my wife's cousin left her husband. It's her fault.

Bless her.

Betty (names have been changed for the standard reason given) left my fraternity buddy, Bob, who had become her husband for a polygamist. They had three kids by then and she planned to take them with her too. I felt so badly for Bob, who I could tell loved his wife and his children more than anything.

It was too difficult to wrap my mind around, so after my wife and I got over spying on her with the guy, I decided to write a story about it. It all eventually transformed itself into a story about some Catholic gal from the Midwest who left her spouse for a Western polygamist. So for me writing a novel started out quite haphazardly . . . unplanned. From that initial beginning, I started getting more and more organized and making more and more plans.

Anyone who wants to make their writing business better needs a plan. And such a plan shouldn't be nebulous. It should be written. It also ought to be malleable, dynamic, and able to adapt to the situation.

The United States Small Business Administration has a section on making business plans. It is also viable to search Google to find plans for writers and freelancers.

Your business plan and the Internal Revenue Code (IRC) will have something in common. Every time you reread your plan, just like the Congress reading the IRC, you'll find something you want to revise. Something you think you can make better. Something that will increase the chances that you will succeed and be able to make money in your writing activity. Your business plan should be a work in process, a series of actions, with changes when needed to bring about results.

Plan on it.

HOW MANY YEARS

Many writers who have written for quite a while but haven't had much success at making a profit ask me how long they have before they must make a profit. Most of them have heard of the presumptive rule that if you make a profit a couple of years out of five you're home free. Almost everybody that's a novice misunderstands the presumptive rule. They seem to believe that it's an absolute rule. That unless you make a profit two of five years, you're out of luck. But it's not. It says nothing about how long you have to make a profit to have a valid profit motive. There is no absolute rule to that effect. The presumptive rule just says that if you have a profit two of five years, IRS will assume you have a profit motive.

So how long do you have? Far be it from me to say with exactitude. That is not the nature of taxation or of law, for that matter.

John Ellsworth had losses for thirteen years. Big losses. They ranged from over $21,000 to over $74,000. They probably averaged around $55,000 per year. He wasn't a writer, though. He was a cattle breeder. And it wasn't as though he didn't have revenue from his activity. Beginning with the third year, he had substantial gross profit. It's just that his operating expenses above and beyond the costs of purchasing cattle exceeded his gross profit.

Another crucial factor in Ellsworth's case is that he was getting back into cattle breeding after having been successful in it in his earlier life. He was quite old --- I believe 65 --- when he entered into this thirteen-year stint of substantial losses. The court was convinced that it takes about 10 to 15 years to develop a breeding herd with the superior strain and of substantial commercial value. They were satisfied that Ellsworth devoted sufficient time and effort to the enterprise to conclude that it wasn't some lark. You don't do all that work --- even though he employed 12 full-time employees to do all of the heavy lifting --- as a hobby.

How many years does it take? Your guess is as good as mine. It all depends. It depends on whether you can convince the court of three things:

• You conducted your activity in a businesslike way
  
• You had sufficient expertise in your activity and worked at gaining more expertise
  
• You worked at your activity regularly and sufficiently

SCHEDULE C

It's a crazy world. Tell your granddaughter about sleeping beauty and she asks if sleeping beauty had a trust. "Can she avoid death taxes?" she wants to know. And your grandson, he is no better. When you mention a like-kind exchange he knows you're not talking about some transformation, like Clark Kent into Superman. He wants to see the two properties.

Taxes pervade our lives. Income taxes have been with us since they were initiated to pay for the Civil War. Ever since then, they've been utilized for all kinds of wars and social situations. They aren't going away anytime soon. The basic structure has stayed consistent over time and no matter how often people, including the best of our statesmen, suggest a different tack to take with respect to taxation --- whether it's value-added taxes or some other scheme --- the fundamental foundation remains in place.
All income is taxable from whatever source derived. It is called gross income. The only way you get out of being taxed on income is if there is some legislative grace that has been enacted to do so. And I guess that is gross.

If you are in a trade or business --- or you think you are --- the part of the tax return that should interest you is Schedule C. You ought to become acquainted with it.

MAKE THINGS HAPPEN

Businessmen have been known to boast that they don't pay any taxes because they utilize an aggressive taxman that takes advantage of every loophole known to mankind. One joke had an individual saying that he didn't pay taxes anymore, that KPMG did his tax return, and he was getting a $4 billion tax refund. Well, we know what happened with KPMG, don't we?

If you want to utilize the graces granted you under the Internal Revenue Code, it's a good idea to prepare and to become an expert or to consultant someone who is. Too many taxpayers rely on complicated schemes that don't have real substance. They often pay large fees to promoters thinking that they can get tax relief when their own honest effort could have given them the breaks they sought and paid for.

The income tax regulations say in technical, cumbersome, and boring language:

Preparation for the activity [writing] by extensive study of its accepted business, economic, and scientific practices, or consultation with those 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.

So if you want benefits, hit the books and consult the experts. Not only an expert but perhaps a range of experts, covering all of the aspects of your niche. Then implement what the sages say that it takes to succeed in your writing nook. If one of the experts advises you to try something that doesn't work, study some more and consult further and try another sage's idea

You've got to make things happen!

SEDGWICK SLICK

Being a smart aleck with the IRS won't work out quite like it did for Mr. Sedgwick Slick, the phantom of folklore. Sedgwick, a handsome young man, appeared for his IRS audit with his buddy, Barney. Introductions proceeded. Alears introduced herself as the auditor.

After reviewing Sedgwick's records and considering information received from an informant, Alears confronted the good-looking Sedgwick. "Hmmm... Mr. Slick, I'm sorry, but it's plain to me that you're living well beyond the income you've reported on your return. Looks to me like you owe at least four grand in additional taxes for the income you have omitted."

Sedgwick answered, "Please, call me Sedgwick. Gambling's my game. I never lose when I make a bet. Let's say I had a good year."

Alears gave Sedgwick a skeptical stare.

"I see you doubt me," said Sedgwick. "I'll show you, if you want."

Alears asked, "What's on your mind?" She was, after all, an auditor, curious and inquisitive by nature.

Sedgwick smiled broadly at Barney, and then told Alears, "I'll wager 2,000 bucks against what you say that I owe that I can bite my own eye."

Alears wondered what the catch was, but said, "That's not possible. You're on." If she lost, she could adjust her report even though it wouldn't be right.

Sedgwick Slick removed a glass eye, slipped it into his mouth, and parted his lips, revealing the eyeball resting between his teeth.

Alears swore under her breath.

"Double or nothing?" Sedgwick said. "I'll bet I can do the same thing with my other eye."

Clearly, Sedgwick Slick wasn't blind. Alears needed to get out of this predicament. "You're on," she said, deciding that such a feat was impossible.

Sedgwick popped the artificial eye back into its socket. Then he removed a set of dentures, taking them in both of his hands, and manipulating them to nibble at his seeing eye.

Alears almost swallowed her own tongue. Now she was in real trouble. This whole thing had put her job at risk, and she felt horrible about her ethical lapses. She felt sick to her stomach.

"Okay, okay," Sedgwick said. "I see that I've upset you. I didn't want to do that. I'll go double or nothing with you again. This time I'll bet you $1,000 I can stand here" --- he slapped her desktop --- "and take a whiz into your waste paper basket over there by the door and never get a drop anywhere in between."

Alears had no idea what to do. She analyzed the situation as only an IRS auditor could. Her job was at risk. This crook was about to get away without paying his taxes. And there was no way on earth Sedgwick Slick could pull this one off.

"Okay," she said. At the very worst, she figured, if someone noticed the spectacle she could claim Sedgwick Slick was entirely insane. People audited by the IRS often acted in very strange and crazy ways.

So Sedgwick jumped onto her desk, quickly aimed, and let loose. He utterly missed, getting it all over. Sedgwick grinned.

Alears smiled, too. Thank goodness, she thought. Then she noticed Sedgwick's friend, Barney. He had turned green and looked ready to vomit.

"You okay?" Alears asked.

"No," Barney said. "Before we got here, I made a bet with Sedge. He bet me $20,000 that he could take a tinkle on your desk and you'd be happy about it!"

ALEARS AGOG

Alears Agog is a creation of my fantasy. I used her in my tax book, Making Expression Less Taxing, a Freelancer's Tax Resource. She is what is known as a tax auditor at the Internal Revenue Service. Now, I'm not certain that's the terminology they still use for tax auditors today, because I've been retired for a couple of years.

I was with the Internal Revenue Service for over thirty years, and that is the terminology we used those years for people who audited individuals and small businesses in the offices of the Internal Revenue Service as opposed to audits conducted at taxpayers' places of business or residence. (The people who did the field audits were called revenue agents.)

Of course, during the term of George W. Bush, a lot of traditions went by the wayside.

I worked for a few years as a tax auditor myself, from about 1974 to 1979.

I chose Alears's name for a particular reason. Successful tax auditors are incredible listeners. They listen to what taxpayers say to them and take voluminous notes. They are all ears. Their ears are open, agog! I know that agog usually pertains to vision. Eyes, not ears, are usually said to be agog. Isn't that correct? Maybe not. In any event, agog means eager. A good tax auditor is eager. The auditor is full of keen anticipation. Why?

I guess there are a few reasons. They are trained to catch mistakes and errors. Isn't it fun to find out the mistakes of others and be able to do something about it? Well, for many people there is. Beyond that, they are always looking for crooks. There is a sense of self-righteousness and the same level of enthusiasm law enforcement workers often have in catching criminals. Perhaps, for some there is a degree of maliciousness in their machinations. However, my experience is that most tax auditors are simply conscientious workers trying to do the best work they can for their employer with a keen sense that they are civil servants.

Every taxpayer who claims tax benefits against their income must consider what their chances of being audited are. Why is that? Because not every claim you might make as a taxpayer comes clearly within the terms

Let me give an illustration. I spoke at a writers' workshop sometime ago. One of the blooming authors there asked me if he could deduct the books he purchased to read for both research and/or to make himself more proficient as a writer, following the admonitions of many experts on writing that he should read a lot. In other words, not all of the books that he had purchased were on writing or directly related to research for a project he might be working on. They might be just the normal books, magazines, and newspapers that anybody else might read just because they were popular

Could he deduct their costs? What do you think?

If he got audited, a good auditor like Alears Agog probably would question his deduction of some or all of those purchases. They're a couple of reasons, but the main one probably would be that the law doesn't allow an individual to deduct personal living expenses. It does allow a taxpayer to deduct ordinary and necessary business expenses. There is a good argument for saying the cost of the books is a personal expense and a good argument for saying the cost of the books is an ordinary and necessary business expense. There is ambiguity.

The subject writer's situation differs from somebody that works as the proprietor of a restaurant when it comes to deducting the costs of books. There is less ambiguity with respect to the restaurant operator and if such individual attempts to deduct the cost of his John Grisham books he or she will probably fail if audited. On the other hand, if a writer deducts deduct the cost of his books written by John Grisham he or she may well succeed. Or fail.

A BUSINESS PLAN

A few postings ago I mentioned Burnett Outten, the cold-fusion guy. What a hoot! Bernie's circumstances were "singular." No doubt about it

Mistakes can cost you taxes and penalties. It's like a conservative president who tries to deduct right-to-lifers as some kind of tax grace. It just ain't happening. Not anymore, at least. As a nation, we'll probably have to write off the losses of Iraq, big time, but it won't benefit you. No, it will cost you. And me. Everyone. The only thing to do is to learn from the mistake. To utilize it to be smarter and do better in the future. The same is true in your activity as a writer or an artisan.

You need a written plan. Your plan should be to make money, to profit from your expression, whether your expression is in words as a writer or in art or in some other medium. Make some money! The cliché says that the best laid plans of mice and men often go awry. Your plan should be dynamic, not static. It should change, not with the wind, but based upon your operating results; that is, it should change with what happened when you followed your plan but it didn't result in a profit or in an adequate profit to suit you

Your new plan should supplant your old one only if you're convinced that something new can do better than what you were doing before. A plan needs to involve both finances and operations. It should be influenced by the opinion of experts who have earned profits in similar businesses and activities. You should be changing things for efficiency's sake, for the sake of reaching your market, because you think you can sell a new product for greater amount with less effort. Plan and revamp. Keep going until you make money or decide you can't make it. If you keep losing money it becomes increasingly difficult to sell the idea that you are in a trade or business. At some point it becomes almost impossible to convince the IRS cynics.

BURNETT OUTTEN

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.

CARRYING ON

To "carry on" is to continue doing, pursuing, or operating, according to my Merriam Webster dictionary. That is the way it is used in the phrase "carrying on a trade or business." As writers and artisans, if we want the grace that allows us to deduct our expenses relative to such activity, even if they result in a loss, we must make certain that we are carrying on our writing or our artistry.

"Carrying on" can also have a negative connotation. When I used to work for the government it wasn't unusual for those I worked with to be "carrying on" about this or that. They were complaining, usually. I haven't been above and beyond "carrying on" in that vein myself.

For the purposes of writers and artisans and others who do freelancing, with respect to coming within the terms of the grace that allows you to deduct business expenses, to meet the "carrying on" test not a great deal is expected. Activity is the key. Sustained activity. If you travel to Las Vegas once or twice a year hoping to make money gambling, that won't meet the "carrying on" criteria --- for a number of reasons, one of which is that you are not carrying on the activity in a sustained manner. You are not continuing to do, pursue, or operate.

. . . There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business . . .

So reads the salient portion of Section 162 of the Internal Revenue Code. Section 162 goes on and on like I-80 across Nebraska. Read it at your own risk, but there is nothing ordinary or necessary in doing so. We will focus on the meanings of the above words and phrases to see if you as a writer or artisan doing your work as a freelancer qualify for a saving grace.

THE GRACE THAT CAN SAVE

In most decisions of the United States Tax Court, you'll find a phrase something like the following one: "Deductions are a matter of legislative grace, and the taxpayer bears the burden of coming within the terms of a particular statute." If you don't believe me, go to the webpage of the court and conduct a search, and you'll see. You see, "grace" comes up so often because to escape taxes on any income you need a "grace." Believe me, you need grace. So as writers and artisans who freelance, you need to know which particular statutes provide the graces you need.

Now, you might be saying, I am a new writer or a new artisan, and I haven't made any money yet, so I don't have any income. My question back to you is: so how do you live? You don't have any income, or you don't have any income from writing or from your artistry? No income from freelancing at all? If you don't have any income, you don't owe any tax. No income: no tax. Income: maybe tax. It depends upon grace, lovely grace. She's a comely lady.

So what grace do we need to focus on mostly? We need to consider section 162 of the Internal Revenue Code. Don't let the sun go down without considering section 162. (Photograph by Michael Graebler.)

Taxpayers' Rights? What about Freelancers' Rights?

Taxpayer rights? You've got to be kidding, right? There is no escape from tax, is there? Death and taxes are certainties.

Well, forget the rights of a taxpayer for a moment. What writers and artisans who haven't yet had enough success to rely on a retinue of CPAs and attorneys for professional help want to know is what their rights are as writers and artisans until they can afford such experts. Can they do anything before they've even made the first buck from their writing and artistry? Is that possible?

How do the concepts expression and taxation intersect? What are the responsibilities of writers and artisans relative to their expression over against taxes? More importantly, what are the opportunities for writers and artisans in reducing or eliminating their income taxes?

Remember, though, last post we said all income is taxable. Actually all income is taxable from whatever source derived. So we must look for some deliverance, right? What can save writers and artisans--those who are freelancers--from paying taxes on all income?

Grace? I used to know a girl named Grace. She liked a guy named Michael, nice girl . . . but that's another subject. I mean grace: a favor rendered by one who need not do so. More on her . . . er it, next.

Uh-huh. Grace.