Keep a day job. And good records. A sax player recently had to justify his career choice in Tax Court. Tom Carswell was working in Chicago for awhile, until he moved to Wisconsin, where he got a computer programming job while keeping a hand in the business:
Since moving to Wisconsin petitioner has organized the Driftless Jazz Festival in Southwestern Wisconsin and has recorded four compact disks (CDs), including “Catharsis” in 2006 and “Carswell” in 2009. “Carswell” was advertized in the May 2010 edition of JAZZed Magazine.
The Wisconsin years weren’t lucrative:
The following table reflects his gross receipts and net losses from his musical activities:
Year Gross receipts Net loss
2004 $1,483 $12,163
2005 530 11,842
2006 983 17,872
2007 1,615 20,315
2008 2,625 32,541
2009 2,931 26,003
2010 3,154 9,467
Total 13,321 130,203
As is their way, the IRS jumped to the conclusion that the sax playing was a hobby, not a for-profit activity. Judge Kerrigan explains the law (citations omitted):
We are satisfied that petitioner’s musical activities were conducted with continuity and regularity during the years in issue. Nevertheless, a taxpayer must conduct the activity with the requisite profit motive or intent for the activity to be considered a trade or business. The taxpayer generally bears the burden of proving that the requisite profit objective existed.
Apparently our Sax Man has talents in addition to jazz. He convinced the judge that he was, in fact, trying to make money:
Petitioner had a series of losses from 2004 to 2010 and a small profit in 2011. Respondent contends that petitioner’s small profit in 2011 could not offset years of sustained losses that total over $100,000; however, petitioner was able to explain these losses. The music industry changed, and petitioner’s focus moved from performance to original composition and other aspects of music. Petitioner contends that he made adjustments and retooled his career and that he was profitable in 2011…
After considering all the facts and circumstances, we hold that petitioner was engaged in the trade or business of music during the years in issue.
The Sax Man would never have won if he didn’t have the records to support his expenses in the first place. If he didn’t have the mileage and other records, the IRS would have won on substantiation grounds.
As my oldest son is embarking on a career as a professional musician, I can only hope he doesn’t incur six figures in losses before he figures out a profitable business model.
TaxProf, Roe: Did Taxes Cause the Financial Crisis? “And yet the argument that this tax preference for debt played a role in the financial crisis – and that it remains an ongoing risk to financial stability – was quickly rejected.”
Jack Townsend, Sentencing, Redemption and Predicting the Future:
Paroles can permit someone to take a later look to see if there mitigating factors exist that could not be known to the judge in fashioning a sentence, even with Booker discretion. Judges do not always predict the future well.
All hail Skwire’s First Law. The science is settled. (Lynne Kiesling)
Joseph Thorndike, Can Debt Ceiling Debates Be Useful? History Says Maybe. (Tax Analysts Blog):
But the 1953 experience underscores the way in which debt limit debates have historically been used to focus the nation’s political attention on fiscal policy. That leverage has always entailed certain risks. But it’s also been successful – at least once.
Anything’s possible, but refer to Skwire’s First Law.
For those of you who have extended returns, 6 Weeks Is Not That Much Time. (Trish McIntire). Get your information together and to your preparer now.
Jason Dinesen, Glossary of Tax Terms: HSA
Tax Trials, Elmore Leonard’s Tax Connection
TaxProf, The IRS Scandal, Day 111
Clint Stretch is Home From Vacation (Tax Analysts Blog):
Perhaps, with vacation fresh in their minds policymakers can think about tax reform and whether it’s fair to ask ordinary taxpayers to pay tax at higher rates so that wealthier taxpayers can get help from the treasury in buying second homes.
The obvious place to start is with the repeal of the mortgage interest deduction for second homes.
You can’t deduct interest to go on a cruise, after all.
Russ Fox is interviewed. “I needed to either add an employee or a partner, but the tax and regulatory climate in California made that unprofitable. So I moved—both myself and my business—to Nevada.” He also posts on a three time Tax Court loser: The Third Time Wasn’t the Charm
Robert D. Flach surprises with a special midweek Buzz!
The Critical Question: Why Are Cab Fares So Expensive? (Alan Cole, Tax Policy Blog)