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.