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.

WHAT IS A PROFIT MOTIVE

The term "trade" and the term "business" are very important to writers and artisans who want to benefit relative to their income taxes. Nonetheless, the terms "trade" and "business" are undefined in Title 26 of the United States Code, otherwise known as the Internal Revenue Code. There is also no definition given in the federal regulations, an explanatory adjunct to the Internal Revenue Code. Hence, any definitions that apply have arisen in the context of court decisions. The courts have developed a couple of definitional elements. The one relates to the writers' or artisans' profit motive. The other relates to the scope of activities. I mentioned in the previous posting the notion that activities have to be on-going in order for there to be a business or trade. Additionally, there has to be a profit motive.

What is a profit motive? Plain and simple: you do your writing work or artistry because you want to make money. However, the courts have decided it isn't enough to subjectively say you want to make money to satisfy their eventual conclusion that you have the necessary motive. Just saying it doesn't cut it with them. You have to enter into the activity with the good-faith intention of making a profit. You have to believe that a profit can be made from your writing or artistry. Reasonableness has nothing to do with it. A mere hope will not cut it, though. The hope has to be accompanied with specific plans of how you are going to make money. Otherwise the writers' and artisans' assertion is not believable.

Is that all crystal clear? I know it isn't. Next time, I'll illustrate it further by telling you about the taxpayer who claimed he had created a cold fusion system that would solve all of our energy problems.

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.

We Live and Die; We Pay Taxes

It is well established that in life we face two certainties: death and taxes. We will all die, and it is likely that we will all pay taxes. Now I suppose it could be argued there are exceptions. Religious folks often accept the immortality of various saints or prophets. Likewise, many cultures exclude the poor and needy from taxation. However, as writers, artisans, and freelancers, we can probably accept the general premise. We will all die; we will all be taxed.

Given these two certainties it behooves us as we go about our writing, artistry, and whatnot, that we exploit both death and taxes to our advantage. How we go about it in our writing and artistry varies. For example, the picture portrayed in this posting certainly utilizes a symbol of death to make a vivid statement relevant to a cholera outbreak in earlier times. In a section of an unpublished novel I took to my critiquing group last night, I had my protagonist's best friend killed off by the antagonist's hireling by running him down with a vehicle in a parking lot.

The odd thing about death is that we can never accurately report on it ourselves. It needs our imagination to conceive it. Accordingly, it has played and continues to play such a big role in literature that it is difficult to get your arms around it or to fully use it up. Writers and artists and are always conceiving new ways of making it seem real. Perhaps, more importantly, the consideration of death in some sense is the consideration of life.

Taxes are another matter. We all experience taxation. If we don't pay income tax because it doesn't apply to us, we pay sales taxes, or taxes when we buy various tickets to be admitted to entertainment, or a fare, including taxes, to ride on public transportation.

So we are constantly confronted in life with escaping death and taxes. How do we go about it? How do we escape death? How do we escape taxes? Those are questions I wish to explore here to some degree, particularly the latter: escaping taxes. I happen to know something about that because I've spent an entire career involved with taxes. More specifically, income taxes.

I also want to explore the other question, escaping death, because it plays such an important role in writing and in artistry. In literature, we constantly try to understand death and its implications. We utilize conceits associated with it like the afterlife. We contrast love with death. Our music often makes it a theme. I think, for example, of "O Danny Boy" as Ronan Tynan sings it.

Think about this. In the United States of America people are subject to an income tax. The basic principle in the US tax system is that all income from whatever source derived is taxed. Think about that, and I'll cover it some more later. Remember though, all income.

DEATH & TAXES

At least monthly, sometimes more, sometimes less, I escape. Perhaps "escape" is too strong a word. Let's put it this way: I leave the comfortable confines of my home and the company of my endearing family, leaving behind my marital and parental responsibilities, and I make my way down to the Barnes & Noble store in my community. There the Wasatch Writers Chapter of the League of Utah Writers meets to discuss writing or to listen to workshops or lectures by writers and freelancers who usually have more experience than we who attend have. Our guests are interested in sharing their writers' know-how and expertise.

I enjoy these meetings. Maybe you do something similar. Maybe instead of going to your nearby bookstore you go to the library or community center or someone's home to meet with your peers in writing leagues, associations, and organizations to enjoy their company and discuss your passion as writers, artisans, or freelancers of various stripes.

If you are such an individual, this blog might help you. If not, perhaps it's not for you. Check it out, and see what you think. It is intended primarily for those at the threshold of a business as a writer, artisan, or a freelancer. Its focus will be upon taxes and death as they pertain to writers, artisans, and freelancers. At least that's the plan.

Benjamin Franklin's statement about death and taxes has become ubiquitous. He said, "In this world nothing can be said to be certain, except death and taxes." One thing I have learned in all my years is that it is often difficult for regular folks to get a handle on either one of these subjects. In the days and months ahead, I hope to explore the subject as they pertain to artisans and writers who do freelancing. I hope to gain some sort of audience, but we shall see how that works out.