Tag Archives | deductions

A winning tax picture for money-losing artists

You are an artist, or a photographer, or a writer who is trying to make money from your venture but usually don’t succeed. Can you still claim losses on your tax returns?

I’ve often told clients that the answer is yes, if you are conducting yourself in a businesslike manner, attempting to make a profit, and document, document, document your profit-oriented activities. I also warn that an IRS auditor’s skepticism about whether someone has a business tends to rise in direct proportion to the number of years the taxpayer loses money in that venture.

Now, in a case picked up by The New York Times, a Tax Court judge has come down on the side of an artist who lost money in 18 of the past 20 years.

In Tax Court Memo 2014-202, Susan Crile, whose work is in the Metropolitan Museum of Art, the Guggenheim and other museums, successfully defended herself against the IRS’s contention that her work as an artist was a hobby, and also succeeded in showing the court that her work as an artist was a separate activity from her job as a university professor.

While Tax Court Memos cannot be cited as precedent, this is still a big deal for creative professionals and for educators with sideline activities in the same field in which they are experts. The IRS has often gone after those activities as being either hobbies (in which losses cannot be deducted) or un-reimbursed business expenses (in which case the losses that can be taken on a return may be significantly reduced.)

As Peter J. Reilly pointed out on Forbes.com, the court sided with Crile that her art qualifies as a business activity, but she may find herself on the short side of an examination as to what expenses she can actually deduct.

The Tax Court put off to a future date the IRS’s challenge of her expenses. However, it noted that, “Petitioner’s theory for claiming deductions seems to have been that most experiences an artist has may contribute to her art and that most people with whom an artist socializes may become customers or otherwise advance her career. The trial established that a significant number of the deductions she claimed were not, within the meaning of section 162(a), “ordinary and necessary expenses” of conducting her art business but were “personal, living, or family expenses” non-deductible under section 262(a). The latter expenses appear to have included telephone and cable television bills, newspaper and magazine subscriptions, gratuities to doormen in her apartment building, taxicabs to the opera, museums, and social events, restaurant meals with friends and acquaintances, and international travel to gain inspiration from paintings in European museums.”

I’d call that a foreshadowing of bad news coming for Ms. Crile. Watch this space for an update.

“The Situation” is in a not-so-good tax situation

Did you know that “Jersey Shore” reality show personality Michael Sorrentino, aka “The Situation”, and his brother Marc, grossed almost $9 million in a variety of ventures over four years? Me neither, until I read the U.S. District Court indictment, reported inThe New York Times,charging the brothers with conspiracy and filing false tax returns. Michael was also charged with failing to file a tax return for 2011.

The full amount that the government might try to collect isn’t clear, because the indictment charges the brothers with failing to report all of their income and, as the press release from the US Attorney’s Office puts it , “fraudulently claim[ing] millions of dollars in personal expenses as business expenses, including payments for high-end vehicles and clothing, personal grooming expenses, and distributions – or direct payments – from the businesses to personal bank accounts.”

The brothers face potential penalties of up to five years in prison and a $250,000 fine on the conspiracy charge, and up to three years in prison and a $250,000 fine for each filing of a false tax return. Failing to file a tax return could cost Michael as much as a year in prison and a $100,000 fine.

These are, of course, merely accusations, and the brothers are considered innocent unless and until proven guilty. But this is surely not A Situation that The Situation planned on being featured in.

Delta Airlines pays zero tax on $2.7 billion in earnings in 2013

When people have a bad financial year, they generally don’t get any tax benefit. But when corporations lose money, the losses don’t disappear. For tax purposes, they are carried forward to future years, and can result in companies making billions but still owing nothing.

Case in point: Delta Airlines, which, as Bloomberg Business Week explains, won’t owe anything on its $2.7 billion in earnings last year.

Delta isn’t doing anything special here–the ability to carry forward corporate losses is an ordinary and well-established feature of the tax code. And indeed, in some cases an individual taxpayer could have such a bad year that he would have a loss that could carry forward to another year.

Mitt Romney famously said on the campaign trail that corporations are people. What he didn’t explain is that they’re people who sometimes have better tax benefits than actual people.

Arranging a tax-deductible fire

Ever want to help support your local fire department? Several taxpayers over the years have done just that, by allowing the fire department to use their house for training purposes, including–yes–burning down the house.

Why would someone do that? Well, for the tax benefit! No kidding. The idea is that you get to deduct the fair market value of the house as a charitable contribution. And, hey, if you’ve been planning on demolishing that structure so you can build something else, well, all the better–right?

Wrong, says the IRS. Several taxpayers have been unsuccessful in trying to claim this deduction, including the case earlier this summer of Upen and Avanti Patel, who claimed a $339,504 charitable contribution for letting the Fairfax, Virgina, fire department raze their house. The Patels bought the house planning to demolish it. The IRS’s successful stance was that the Patels did not give away the property; they only allowed the fire department to have use of the structure for training purposes, which was at best a license or a partial (nondeductible) gift.

You can read law professor Paul Caron’s tax blog summary, or read the whole case yourself if you’re getting your inner tax geek on.

One interesting note: The Tax Court’s decision was 9-8, indicating that someone trying this may not necessarily see their deduction goes up in flames (sorry!) In fact, former Oregon Republican gubernatorial nominee Chris Dudley got a lot of heat (double-sorry!!) when The Oregonian reported during his campaign that he’d reported a $350,000 charitable contribution after the local fire department burned down his house back in 2004. He replaced the house with an 8,500-square-foot mansion.

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Is a zygote a person? Ask your tax guy.

More than a half-dozen states are considering constitutional amendments, ballot measures or legislation that would declare a fertilized human egg (think back to your high school science classes and the word, “zygote”) to have the legal rights of a person.

I’m not going to get into the logic of this. Oh, heck, sure I will—it’s nuttier than a filbert orchard. The effect would be to outlaw abortion as murder, regardless of circumstance. An amendment to the Mississippi constitution that’s on a November 8 ballot would ban birth control methods such as IUDs and morning-after pills. This is stuff you’d expect to read about happening in the most backward of fundamentalist countries.

But hey, my job is to look at things from a tax standpoint. If a fertilized egg has the legal standing of a person, wouldn’t it logically follow that that tiny group of cells would qualify as someone who could be listed as a dependent on a tax return—just like any other person? And if that’s the case, then of course tax pros such as myself should start asking our clients during tax-season interviews if they are pregnant and if so, when they conceived, so we can determine if there was a potential deduction as of December 31 in the previous year.

(Let’s leave aside the inconvenient fact that most fertilized eggs actually never implant in the uterus. We’re not going to let reality get in the way of potential tax deductions.)

Wait wait, you say—federal law doesn’t recognize an infinitesimally small mass of 100 or 8 or four cells as a human being. No problem! Tax professionals already deal with many areas in which one set of rules apply for state income tax filings and another for federal. For example, same-sex couples in state-recognized domestic partnerships can file a joint state tax return at the state level even though they are barred from filing jointly at the federal level.

No reason we can’t have little Billy Blastocyte appearing as a qualifying deduction on state returns while being invisible on the federal return.

Not sure how we’ll handle the requirement that every “person” listed on a tax return have a Social Security Number.

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