Maybe I've mentioned this case before. If so, I'm going to mention it again. It came out in 1999, about ten years ago now. It is a United States Tax Court case, TC Memo 1999-163 involving Rick and Ruth Richards. The Richards represented themselves before the court. IRS audited them and determined a deficiency for the year 1994, some sixteen years ago now. The deficiency that the IRS alleged was $1,328 and they asserted that the Richards had not exercised ordinary business care and prudence by alleging a penalty in the amount of $266.
Rick was a writer. He deducted a business loss relative to his writing activities. The IRS said his writing activities didn't constitute a trade or business, but comprised a hobby. For this post, I will handle that issue. Other issues will come in subsequent posts.
The Richards lived in Palm Springs, California.
Among expenses Rick claimed relative to his writing were the following:
Typewriter (ribbons and repairs) | $198 |
Stationery, desk and office supplies | 940 |
Registry | 680 |
Copies | 370 |
Research books, magazines & trade publications | 760 |
Must-see movies, stage plays, country and gospel concerts | 1,140 |
Travel trailer maintenance, supplies and repairs | 2,480 |
Research trip to Alaska | 3,296 |
Research trip to Mexico | 1,319 |
Miscellaneous (primarily travel expenses) | 3,120 |
TV sets, the VCR & videotapes | 569 |
Audio tape-recording & copying equipment plus studio time fees | 560 |
Fax messages and responses | 115 |
Shipping costs | 1,189 |
Office preparation | 180 |
Long-distance calls | 1,114 |
Cash telephone calls | 240 |
Total | 18,684 |
The Richards were both in activities that were challenged by the IRS as hobbies, so it is difficult to set forth exactly what expenses were Rick then what expenses were his wife's. She was an actress. Their combined losses relative to their respective activities of writing and acting were something like the following for the years preceding and succeeding the year that was before the court:
Year | Income | Expenses | Profit/(loss) |
1991 | --- | $28,307 | ($28,307) |
1992 | --- | 29,103 | (29,103) |
1993 | --- | 30,616 | (30,616) |
1995 | --- | --- | (24,278) |
1996 | $814 | 30,877 | (30,063) |
The Richards did have income from their activities from 1991 to 1993 but reported it with their wages. The income amounts were nominal in comparison to the expenses they claimed.
Rick's first job as a writer came in 1940 when he wrote stage material for Bob Crosby's band. It was intended to be funny and included lyrics, parodies, and original songs. He also ended up working for various publishers in New York. During one period of time he served in the military. In the 1950s, Rick started writing short stories. He lived in Pennsylvania and wrote 88 short stories has sold 39 of them. He also started writing novels.
The Richards actually married sometime in the early 1960s and that is when they moved to Palm Springs. Rick continued writing novels at first but soon put that aside to work in the blooming and more-lucrative entertainment business. He obtained contracts with various comedians and met producers through them. As a freelancer, he ended up writing situation comedies, and he was able to sell his work doing sitcoms throughout the 1960s and 1970s. Some of the familiar shows he wrote episodes for include The Lucy Show, The Odd Couple, Love American Style, The Addams Family, The Beverly Hillbillies, and Petticoat Junction. In 1974 he sold a screenplay to a Canadian company.
By the 1980s, Rick no longer found writing sitcoms that fun; the novelty had apparently worn off. He switched to ninety-minute television movies. However, the networks didn't cooperate and canceled their ninety-minute movies. So Rick switched too. He started writing screenplays for the two-hour timeslots the networks then wanted. In the 1980s and 1990s, he branched out, trying different things. Things start to slow down and fall apart. One project got scheduled for three different occasions but canceled at the last minute each time. Another time, Rick received an option payment of $1,500, but the company, Columbia Pictures, never exercised the option. Rick testified that various producers and directors and whatnot were interested in his work, but things just didn't work out. He tried to work out specific deals with specific individuals, around the problems and things got canceled or placed in abeyance.
Rick didn't have a regular agent. If he thought he had a deal to work through, he would hire an agent to discuss money with the executives of the movie industry. He said agents were able to get more money for his work.
Rick's mode of operation was to work on 4 to 6 different screenplays at a time, knowing that if he sold just one of them it would be quite lucrative. In 1993 or 1994 he pitched an idea about a screenplay to an agent with Creative Artists Agency. The agent thought highly of the idea and indicated he would try to market it. Rick got busy and wrote the screenplay, but by the time he went to trial it had not been sold.
Sometimes Rick wrote lyrics for country and gospel songs. He didn't write the melodies and so most of his experiences writing lyrics were collaborative. In order to facilitate his lyric writing, he traveled to numerous country and gospel concerts. However, he never sold the song.
So that's pretty much the facts the court said it dealt with in deciding whether or not Rick had a viable trade or business as a writer.
So what do you think? Did he have the requisite continuity of activity and the profit motive?
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