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.

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.

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.

Dizziness, Nausea, Regurgitation, and Loss of Consciousness

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


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

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

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

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

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


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

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