Searchlight, Nevada

When unhappy with his press release, Ralph rewrote it and sent changes to Northwest. When dissatisfied with Northwest’s marketing, he wrote demanding that they comply with the terms of their agreement.

By letter dated January 22, 1996, Northwest’s account executive told Ralph that 6,800 copies of Searchlight, Nevada had been ordered and shipped. It didn’t say who placed the orders or where they shipped them, but said that another 2,500 copies had been ordered by the chain Books A Million. Northwest promised royalty statements in about three weeks.

On his 1996 Form 1040, Ralph reported $2,600 in gross royalties from his writing activity.

In late 1993, after signing with Northwest for Searchlight, Nevada, Ralph began researching Nevada Nights, San Joaquin Dawn. He wanted to document the difficulties that women face when attempting a break from prostitution. “The story’s never been done before to any degree of authenticity,” he said, explaining that he thought it was commercially viable.

Ralph, however, had learned that rooms at brothels were equipped with listening devices. Therefore he met prostitutes at other locations on “out calls,” paying by credit card. In 1994, during January, February, April, May, June, and July, he spent from one to six days a month in Nevada on “out calls.” He successfully encouraged ten prostitutes to leave their profession. As of his trial, he hadn’t finished Nevada Nights, San Joaquin Dawn.

Some time after signing with Northwest on Searchlight, Nevada, Ralph submitted the 450-page Lightning at Dawn. He thought that Northwest only required a joint venture payment for first novels, and so if Northwest agreed to publish Lightning at Dawn, he’d not have to pay anything. He also tried marketing Boys and Girls Together, but stopped when he was told that there was no need or market for that type of short stories at the time.

Making the Deal and Working It

Ralph and Northwest reached an agreement for publication of Searchlight, Nevada on October 13, 1993. This agreement had Ralph paying Northwest $4,375 to publish ten thousand copies. Northwest’s marketing director wrote Ralph confirming receipt of Ralph’s money and described it as a “joint-venture payment.” The company’s operations officer explained via letter that Ralph’s payment represented about a fourth of production and marketing costs for ten thousand copies.

The agreement required Northwest to give a hundred “free” copies to Ralph and two hundred to major bookstores and book reviewers, to sell 2,500 copies through its “test market program,” and to sell the remaining books in the retail marketplace.

Ralph was to get forty percent of the retail amount of each book sold through the test market program and a royalty of fifteen percent of the retail price of remaining books sold to bookstores and wholesalers.

Northwest was expected to pay royalties January 31^st and July 31^st each year along with interest for late payments. It would do a certain amount of sales promotion, advertising, and publicity. It was to have exclusive rights to the book.

Northwest representatives told Ralph that his book would probably earn him at least $20,000 in royalties.

Northwest published and released the 131-page Searchlight, Nevada in December 1995 with a retail price of $7.95. The book went on sale at Barnes & Noble Booksellers in Boynton Beach, Florida, and Falls Church, Virginia, and at Super Crown Books, store #106. People could also acquire it in Bailey’s Crossroads, Virginia, by special order through Borders Books and Music.

Prior to its release, Ralph worked in all stages of publication. In 1994, having reviewed its galley proofs, he asked about adding two chapters. By letter at the end of February 1995, he suggested cover designs and attached pictures, showing how he thought characters on the cover should look. He promised to provide any additional assistance he could, saying that he realized the cover design equaled the storyline in importance. It didn’t matter if the story was good if readers failed to buy it. Optimistic about the joint venture, he believed they’d have a “hot seller” and sell over 100,000 copies.

Ralph gave Northwest’s public relations department mailing lists and telephone numbers of bookstores, newspapers, magazines, and radio and motion picture companies. On his own, he mailed about sixty complimentary copies of the book along with individualized letters to bookstores, newspapers, magazines, and hotels. He worked with Northwest’s marketing expert to get it stocked with distributors and to set up book signings at major bookstores.

The Adventures of Two Men Who . . .

Ralph resolved to write a story about the adventures of two men who travel across the country to patronize Nevada brothels, where such establishments are—ahem—legal. In early 1993, Ralph drafted an 18,000-word basic storyline. He submitted his draft along with Lightning at Dawn and Boys and Girls Together in June for copyright protection. Ostensibly to make the story realistic and to develop characters with fidelity, Ralph visited numerous legal brothels in Nevada as a “customer.”

I can hear cogs in your mind working. If you’re like most, you’re saying, “Never mind telling me about deducting traveling expenses for going to Vietnam to obtain motorcycle pictures for a picture book.” A more vital question is: could Ralph deduct those costs? Well, we’ll see.

Ralph wrote in his journal. Note that, to Ralph’s credit, he kept a non-financial contemporaneous record. He wrote about his personal experiences at these—excuse me—whorehouses. He chronicled which bordellos he visited, the dates and even, sometimes, the hours.

Ralph’s notes described prostitutes he met and the amounts of lucre he paid. For each journal entry, Ralph wrote about these visits, about what happens at cathouses (Like people don’t know?). For instance, Ralph described selecting his strumpets, the “house rules,” negotiating prices for a gal’s time, their discourse—yes, discourse, not some other course—and the ladies’ clothing. He included personal information on his courtesans, including age, physical characteristics, place of residence, religion, ethnicity, education, and names and ages of offspring.

Ralph’s journal indicates that, at some point during said encounters, he told the demimonde he was writing a book about Nevada’s bordellos. He wanted to use them as characters.

The journal shows that during 1993 Ralph spent about three days a month—except in February, May, and December—meeting prostitutes at brothels. Using materials so gathered, he produced Searchlight, Nevada.

Anxious to sell his work, Ralph consulted the 1993 Writer’s Market. There he read about Northwest Publishing, Inc. Northwest’s entry stated that it published hardcover, trade paperback, and mass market originals and reprints, between forty and fifty titles a year on seven to eight hundred queries and five hundred manuscripts a year. Some eighty-five percent of said manuscripts came from first-time authors and ninety-five percent came from unagented writers. Northwest said that it paid a ten to fifteen percent royalty on retail price, publishing books four months after acceptance of submitted manuscripts.

Some of the Facts

Ralph, like me, had worked for the Treasury Department, although he didn’t work for the IRS, which is an agency within Treasury. His work as a budget analyst followed his graduation from the University of Maryland with a bachelor’s degree in marketing and advertising, augmented by twenty-four credit hours of English, journalism, and speech.

He retired from Treasury in January 1997 with 35 years of service. Part of his job (one of six critical elements) required him to “write budget justifications, procedures, and other written material by applying professional-level writing ability to create high-quality written work.” (Certainly Ralph wouldn’t have had the subject matter to write much of a thriller, but maybe he had a sense of humor. It was a bureaucracy, after all.)

Just before Ralph retired, his manager rated Ralph’s performance “outstanding” in this “writing” element. “Outstanding” exceeded “excellent” under this system. Go figure.

Anyway, in Ralph’s employment, “excellent” meant writing budget justifications, statistical reports, procedures, guidelines, and other written materials clearly, concisely, and correctly. It included:

•      Using excellent grammar and spelling.

•      Communicating ideas effectively, especially narratives.

•      Presenting ideas clearly so recipients asked few follow-up questions.

•      Structuring paragraphs and sentences correctly.

•      Working independently in drafting material and seeking guidance only when goals changed.

•      Recipients receiving well and acting upon the written budget justifications.

•      Doing only one revision per finished product.

Our man Ralph did even better than all of that since he received “outstanding” ratings. It was like getting an “A” plus-plus, I guess.

Ralph’s office staff, mostly accountants, used Ralph to do their writing. He contributed to a comprehensive agency-wide report in which agencies evaluated internal control and accounting systems. He edited the in-house newsletter of Treasury. So Ralph brought writing skill and experience to the table.

In 1992, about two years before he was eligible to retire, Ralph started writing outside his Treasury job. Fearful of retirement, he told the IRS and the court that he had hoped to make writing a second career. His first book-length manuscript of fiction was Lightning at Dawn. Later that year he wrote a collection of short stories called Boys and Girls Together. Before marketing these manuscripts for publication, he had an idea for another book.

Now what I’m about to tell you may seem incongruent for a bureaucrat like Ralph who worked for Treasury with a bunch of accountants writing staid budget proposals. He was at least fifty-five years old, maybe older.

Don’t be too surprised.

Tune in next time for a shock.

Venting Frustration by Turning the Tables

You know, there’s a plethora of wisecracks about tax auditors. For instance, one says that the Postal Service just recalled its newest stamps because they picture famous IRS agents on them. People couldn't figure out on which side to spit. Another witticism asks, “What do you call twenty-five IRS agents buried up to their chins in cement?”

“Inadequate cement.”

Venting frustration through humor makes sense. An additional way to vent is to turn the tables on a tax auditor with solid documentation of your hard work and preparation, enabling you to claim a few of the tax perks for self-employed persons. Of course, the ruling administration always claims that the IRS is simply liberating people—primarily, the working middle and lower classes—from fiscal burden.

A tax case involving a writing activity played out in Tax Court in Arlington, Virginia, the case of Ralph Louis Vitale, Jr.1 Let’s look at it relative to preparation and expertise. I don’t know if Mr. Vitale goes by Ralph or Louis or some other appellation among friends and acquaintances, but I’d like to call him Ralph. It seems such an improbable name for what his writing focused on after retirement. To me his last name, Vitale—reminding me of “vital” or “vitality”—seems more apropos. Anyway, the guy had verve, although some might say he was just libidinous. You be the judge.

Let me give you the facts in the next posting.

1 Ralph Louis Vitale, Jr. v. Commissioner, TC Memo. 1999-131 affirmed by unpublished opinion of the Fourth Circuit at 217 F.3d 843.

What to Do? What to Do?

It is no small thing to draft a book, and there is little doubt Sarah worked at her writing activity. What should Sarah have done differently? Here are some suggestions.

·       From 1976 to 1980, even while working for Yale as a research associate and computer programmer, if she intended to write for profit in the future, she should have:

o   Begun writing

o   Taken pertinent classes

o   Formulated a business plan

o   Joined and participated in a writer’s league

o   Attended writer’s conferences

o   Joined a critiquing group

o   Started submitting pieces to contests and publishers

·       When she learned of the publisher of travel guides who needed information for a revision to an African travel guide and contacted the firm and received information regarding submissions, she should have incorporated such into her plan and followed up or explained why she hadn’t.

·       While in Africa and Israel and employed by Weizmann, Sarah should have tracked her writing efforts, logging typewriter use, research time and efforts, and any other efforts she expended to write her draft based upon her adventures there. Did she work eight hours a day for her employer and write for one hour a day? She should have kept financial and non-financial records of writing activities. Also, she should have modeled an exemplar, someone who had already sold well and made lots of money in her genre— Bill Bryson, who wrote A Walk in the Woods and, much later, In a Sunburned Country comes to mind. At the same time she should have retained her originality and voice and planned how her work could compete or fill a new niche. (It’s hard to convince the IRS or the Tax Court that you moved somewhere to gather writing materials to write a particular piece of fiction while you’re making substantial wages from your employer. That’s especially true if the wages you make are substantial compared to the revenue or potential revenue of writing.)

·       Sarah should have gotten her work published. At the very least, she should have shown she consumed herself trying and that she had an alternative business plan to market it. It wouldn’t hurt, for example, to show that she could at worst self-publish and peddle her work. Potentially, then she could eventually generate revenues like forerunner Bill Bryson. (Of course, her writing skill would have to rival or exceed his—perhaps this would be another goal for her business plan.)

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.

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.

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.

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.

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.

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.

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.

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.

. . . 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.

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:


Summary

“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.

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.

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.

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.

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.