Originally published on Forbes.com. Oct 8th, 2014
Susan Crile is a renowned painter and printmaker. Her politically charged works are in the collections of the Metropolitan Museum of Art, the Guggenheim Museum, and several other institutions including the Worcester Art Museum. She may be best known for her works based on the photographs of the abuses at Abu Ghraib prison in 2004. Thus it was rather odd that the IRS decided to go after her with Code Section 183 (Activities Not Engaged in For Profit) which is usually applied to the sketchiest of tax shelters and professionals and business executives trying to live out boyhood dreams of being cowboys and pilots and the like with tax-deductible dollars.
Didn’t I Just Read About Susan Crile On This Very Blog?
Very good returning reader. Yes, you did. And for new readers here is the link to my previous coverage and that of Tony Nitti. Tony’s opening line “It has to suck to make your living as an artist” is a trenchant observation on the practitioners of most creative pursuits even, if I may be so bold, tax blogging. In my study of the tax blogosphere which is peopled by tax preparers, planners, and academics of various sorts, I have yet to find a tax blogger who has given up his or her day job to launch a full time writing career. Last year my day job at Grant Thornton gave me up, but it did not take me long to cobble together enough consulting work to keep my retirement accounts intact for a few more years.
So What Brings Susan Crile Back To These Pages?
There has been a new development. Judge Albert Lauber’s Tax Court decision in Susan Crile, Petitioner v Commissioner of Internal Revenue Service, Respondent TCM 2014-202 is one of the rare Tax Court decisions that has broken its way out of the tax blog ghetto into the mainstream. Randy Kennedy wrote about the case in the Arts & Design section of the New York Times. – Tax Court Ruling Is Seen as a Victory for Artists. Tony and I both heard from Studio 360. He was quicker getting back to them so he will get what glory there is for tax bloggers on NPR this weekend. Kennedy’s piece seems to be getting picked up in the art world, with mentions like this one. Given all that, I thought it might be worthwhile to do something of a round-up of Section 183 cases over the last several years with a particular emphasis on those that bear some similarity to Professor Crile’s case. Fortunately, I don’t have to look far for coverage because I might say that Section 183, sometimes referred to as”hobby loss”, cases are something of a hobby of mine.
Overview
As I noted the typical hobby loss case involves someone who has done well in one field and then loses money in another field. The IRS seems to have a particular animus to people who take up horse breeding, although horse breeders often win in Tax Court. Racecar drivers generally don’t do that well. Probably the worst Section 183 case to bring forward is that of an Amway “Independent Business Owner”. I traced their record back to the beginning of time and it is really sad. Of course, there are many purported attempts at profitability that the IRS doubts. Among the more common cases are ranching and airplane and yacht chartering. At least in a broadly defined sense, activities with some artistic component do show up from time to time.
Why The IRS Should Have Known They Were Going To Lose
The case with that has the strongest resemblance to Susan Crile’s (and was cited by Judge Lauber) is the 1979 decision of the Tax Court in the case of Gloria Churchman. Ms. Churchman showed a record of solid artistic achievement and no profits, although not from lack of trying:
In 1969, petitioner designed and ran a gallery where her work was shown and she sold a number of her posters at such gallery. During the period in question, petitioner exhibited her paintings and sculptures at least once a year at commercial galleries or other places where the public might see and purchase them. She has had one-woman shows at galleries in San Francisco and San Rafael, Calif. In the year prior to trial herein, petitioner had three shows. In addition, petitioner opens her home studio to the public at least once a year.
Petitioner maintains a mailing list of about 200 names of students, friends, customers of the art gallery which she ran, and members of organizations to which she belongs, including an art club. When she has a show petitioner sends an announcement of it to the people on such list. In addition, gallery shows are announced by the gallery through newspapers as well as the gallery’s own mailing list.
Petitioner began making posters and books in order to make her work more available to the public and more profitable, and she went to galleries in New York and San Francisco seeking to have her work shown there but she was largely unsuccessful. Such galleries, however, encouraged petitioner to go on with her work in the hope that it might one day be shown. At the time of trial, she was working on a book in which much of the work that petitioner has done in the past 20 years will be reproduced and thereby made more available to the public.
It was enough for the Tax Court.
It is abundantly clear from her testimony and from the objective evidence that petitioner is a most dedicated artist, craves personal recognition as an artist, and believes that selling her work for a profit represents the attainment of such recognition. Therefore, petitioner intends and expects to make a profit. For section 183 purposes, it seems to us irrelevant whether petitioner intends to make a profit because it symbolizes success in her chosen career or because it is the pathway to material wealth. In either case, the essential fact remains that petitioner does intend to make a profit from her artwork and she sincerely believes that if she continues to paint she will do so.
Petitioner has a relatively large inventory, she has considerable training, she devotes substantial time to her artwork, she has sold some paintings in the past, and is attempting to sell more. It is certainly conceivable, in our view, that she may someday sell enough of her paintings to enable her “to recoup the losses which have meanwhile been sustained in the intervening years.”
There is a good discussion of the Churchman case on FreelanceTaxation.com.
The Churchman case is so painfully like the Crile case, that I suspect IRS people are kicking themselves for having pushed so hard creating another precedent. Churchman has been cited numerous times in cases that went both ways in many different types of endeavors. Sally Ann Renner, an art teacher, was denied home studio expenses in 1984, but she had never sold a single painting. Herbert Stahnkes deductions for his writing and lecturing on venomous animals were not poisoned by lack of profitability. More recently Lee Storey, a full-time attorney, was allowed substantial losses for a documentary project which produced Smile Till It Hurts, which was about the Up With People program.
Other Art Related Cases
Also relatively recently, there is one case of a musician who beat the IRS in Tax Court and some band backers who lost. Sal Westrich was a history professor at Pratt Institute in Brooklyn. The Tax Court decided that his book about New Jersey Wine did not require trips to France.
Other Comments On The Crile Case
As I noted in my first piece, Professor Crile is not out of the woods yet. Judge Lauber decided to split the case into two parts. The first, which she won handily, is about whether her art]business should be respected as a ]business, rather than being viewed as incidental to her job teaching art (She would still have deductions, but they are not as favorable. There is that GD alternative minimum tax. Don’t get me started. The other question is to what extent her claimed deductions qualify as business deductions as opposed to personal expenses. That ruling is not out yet, but there seems to be some indication that it will not be as favorable. That aspect prompted the comment Lew Taishoff shared with me:
It wasn’t so much her status as an artist that set off the bells, as it was the wiseguy deductions she took when she had plenty of income from another source.
I also checked in with my friend Matt Erskine, whose boutique law practice specializes in unique assets. Matt’s office is a short walk to the Worcester Art Museum, where one of Susan Crile’s works lives. Matt’s thoughts on the IRS approach line up with mine pretty well:
From a tax perspective, I do not get the argument the IRS is making, that is that the Taxpayer cannot take as a deduction the costs of materials, travel and meals associated with selling her art. Presumably if it is not considered a ]business expense, then it is deductible as an unreimbursed employee expense. If it is not allowed as an unreimbursed employee expense, then it is allowed as a hobby expense (to the extent you have hobby income). Besides, it seems to me that for the possible “win ” for the IRS ($81,000 in taxes over 5 years) it seems to be a lot of firepower to bring to bear when in all likelihood the same expenses would be deductible anyway. Using a howitzer to kill a flea.
I think that the underlying context is that the IRS is trying to pick what are “serious” businesses and what are not based on their subjective opinion and not based on the facts on the ground. Creative artists (painters, printmakers, writers, etc.) often cultivate the image that they are doing things for a higher purpose than just making money, and popular culture takes them up on that. This fiction infects the IRS when it considers whether there is a “serious” business, whence the lack of a business plan being cited as a justification for denying the deductions.
Breaking Out Of The Tax Ghetto
As I noted it is rare for Tax Court cases to get much attention outside of the tax world. There was one case where I expected that but was disappointed. It actually had two hobby loss components – airplane remanufacturing and yacht leasing – among a host of other issues. The taxpayer was none other than the great F. Lee Bailey, who had as his attorney, the great F. Lee Bailey. I bemoaned the lack of interest in a post titled F. Lee Bailey Tax Attorney – More Fun Than Anietra Hamper’s Underwear. Anietra Hamper was a TV anchorwoman who thought she should be able to deduct the clothing that she wore on air. She lost because her station’s Woman’s Wardrobe Guidelines indicated that women on the air were supposed to dress like, well CPAs, I suppose. Among the items of clothing that she deducted were some that are, you know, unmentionable. That one went viral, which shows that immature as tax bloggers can be, the mainstream media is even worse.