"I Could Write a Book"
"I COULD WRITE A BOOK"
But That Doesn't Mean You Get a Deduction
Budding authors, before you sing Richard Rodgers' and Lorenz Hart's 1940 classic song from "Pal Joey", read and heed the lesson United States Tax Court Judge Vasquez gives you would-be best-sellers in Michael S. Oros, 2012 T. C. Mem. 4, filed 1/4/12.
Mike worked full-time for Intel (ba-bing, ba-bing), but he hankered for far horizons and, he claimed, for the fame and fortune of professional authordom. So he wrote up a business plan (he had an MBA), and took off on a four-month trip spanning two tax years, during which he visited South America, Australia, Asia and Africa. He collected vacation pay and sabbatical pay from Intel while doing so. He said he was going to write a book, self-publish it and make money therefrom.
Mike took 4542 photographs (though not professionally-trained, he claimed he was an accomplished amateur photog), kept a detailed diary of his travels, and arranged his travels around events he wanted to see and photograph. He produced credit card receipts and statements from his trip at trial, but didn't itemize what was business and what wasn't.
But four years after his trip, all Mike had was a 100 to 150 page first draft of his book, which didn't make it into the record at trial. And Mike had never written anything before.
Mike seeks about $19K in Schedule C deductions, against no income. Mike didn't give up the day job at Intel.
Now Judge Vasquez agrees that just because someone hasn't published before, they're not in the trade or business of writing for profit. Every for-profit author had a first story that didn't make money. And just because they have a day job doesn't mean they're not a for-profit author, either. Moreover, IRS never claimed Mike wasn't in it for profit.
But the newbie Shakespeare has to show continuous effort, or, as Judge Vasquez puts it, "(P)etitioner failed to produce evidence to show some intent or effect on his part to engage in and continue in the writing field with substantial regularity and with the purpose of producing income and a livelihood. In Hawkins v. Commissioner, supra, we noted that the taxpayer's published book of poetry "could just as easily be an isolated venture for the personal satisfaction of * * * [the taxpayer] seeing * * * [her] poetry in print as it could be a product of trade or business." Id. The same could be said of petitioner; his planned travel book could just as easily be an isolated venture for the personal satisfaction of taking a worldwide trip and seeing his travel adventures in print as it could be a product of a trade or business." 2012 T. C. Mem. 4, at p. 7.
And you can satisfy your intellectual curiosity about the Hawkins case at Hawkins v. Commissioner, T.C. Memo. 1979-101, affd. without published opinion 652 F.2d 62 (9th Cir. 1981).
Anyway, even if Mike was in it for the money, he falls foul of the strict substantiation of Section 274(d), IRS' big torpedo for eager taxpayers.
So Mike's literary venture, while personally rewarding and possibly artistically meritorious, fails of taxpayer subsidy.
IRS says "Time for the five-and-ten, the Section 6662(a) negligence with substantial understatement (the greater of $5000 or ten percent of tax properly due) penalty on top". But Mike says he went to his friendly neighborhood tax preparer, who had more than 36 years of experience, and told the preparer the whole story. And said preparer told Mike to go for it.
So Mike acted in good faith and with reasonable cause, and, as Judge Vasquez puts it, "(B)ecause the reasonable cause and good faith exception is a defense to both negligence and a substantial understatement of income tax, the section 6662 penalty does not apply." 2012 T. C. Mem. 4, at p. 11.
Takeaway--Just because you could write a book doesn't mean you're in it for the gold. Write and keep writing, substantiate and keep substantiating, even if you don't give up the day job.
Of course, the foregoing should not be construed, and may not be used, as (a) legal advice, or (b) to abate in whole or in part any interest or penalties for, related to, or in connection with any tax or imposition by any governmental authority having or asserting jurisdiction, or (c) solicitation of retention or employment, or for the furnishing of legal or non-legal services, or (d) to create a client-attorney relationship or privilege.