Originally published on Forbes.com,
Joy Ford was a country music recording artist and has devoted much of her life to performing and promoting country music.
Ms. Ford and her late husband Sherman purchased a property called Bell Cove which serves as a venue that allows songwriters to have their songs performed for talent scouts, agents, and record producers. At least in 2012, 2013 and 2014 Bell Cove was not a moneymaker for Ms. Ford. Quite the opposite – she posted over $200,000 in losses over that three year period. As you might expect, since you are reading about this on my blog rather than Music Row, the IRS disallowed the losses.
A Brief Opinion
The late Mr. Ford has apparently provided well for Ms. Ford as she was receiving trust distributions of over $180,000 in each of the three years. Bell Cove provided country music on Fridays and Saturday for a five dollar admission charge. The admission charges and nominal amount for snacks did not usually cover the $500 paid to the performer. In no years were there gross receipts over $20,000 (That might be an important number to remember).
Judge Foley did not even bother to enumerate the nine factors for regulation 1.183-2(b) in his decision (TCM 2018-8), which was pretty short. Here is the meat of it (with references omitted):
Ms. Ford and her late husband Sherman purchased a property called Bell Cove which serves as a venue that allows songwriters to have their songs performed for talent scouts, agents, and record producers. At least in 2012, 2013 and 2014 Bell Cove was not a moneymaker for Ms. Ford. Quite the opposite – she posted over $200,000 in losses over that three year period. As you might expect, since you are reading about this on my blog rather than Music Row, the IRS disallowed the losses.
Section 183(b) limits the deductions relating to an activity not engaged in for profit. In short, petitioner did not have the requisite intent to make a profit and thus may not deduct the losses in dispute. She had no expertise in club ownership, maintained inadequate records, disregarded expert business advice, nonchalantly accepted Bell Cove’s perpetual losses, and made no attempt to reduce expenses, increase revenue, or improve Bell Cove’s overall performance. . Owning Bell Cove elevated petitioner’s status in the country music community, allowed her to further the careers of young performers, offered her weekly opportunities to interact with country music fans, and satiated her love for promoting country music. Petitioner earnestly devoted time and energy to Bell Cove but was primarily motivated by personal pleasure, not profit, and simply used the club’s losses to offset her trust and capital gain income.
What intrigues me about this case, is that it appears that Ms. Ford besides not trying very hard to make money at Bell Cove did not try very hard to win this case. Ms. Ford is not intimidated by courts as her struggle against the eminent domain taking of her building on Music Row in Nashville shows.
Did She Fight As Hard As She Might Have?
Reilly’s Laws of Tax Planning – The Prime Directive – If you don’t have documentation, at least have a plausible story. Somehow or other, running that venue must connect to Ms. Ford’s income from the trusts or, if not, it might provide the basis for a revival of her popularity. There must have been some sort of potential argument for better grouping or for potential appreciation. That those arguments were not addressed indicates to me that they were not made. Of course, if this were some other federal court, I could easily check that theory, but this is the Tax Court where the hoops that must be jumped through to get documents are beyond my meager means.
And about that $20,000. TIGTA has been critical of the IRS for letting too many potential potential hobby loss cases slide by. The criteria that TIGTA used to develop its sample of 9,699 potential returns was a Schedule C with gross receipts less than $20,000 and losses greater than $20,000 and other income over $100,000. We don’t know how TIGTA came up with those criteria, but if it was a previous rule of thumb, it is possible that another $7,000 in revenue per year might have spared Ms. Ford all this trouble. Of course, I’m not supposed to give you audit lottery advice, so forget I mentioned that.
An IRS Slip-up
Accuracy penalties are routinely asserted in cases like this and usually approved. Not this time and it is not because Ms. Ford had great advice or kept meticulous records.
Respondent failed to present any evidence that the penalties were “personally approved (in writing) by the immediate supervisor of the individual making such determination.
Like we used to say at Joseph B Cohan and Associates – Better to be lucky than good.
Other Coverage
Roger Russell had something in accountingtoday – Country music losses limited by hobby loss rule.
Bryan Camp on TaxProf Blog had – Lesson From The Tax Court: Country Music Ain’t All Business
So it was love of music, and not love of lucre, that made Ms. Ford spend her money to keep Bell Cove Club going. No doubt her efforts have enabled many to enjoy music they might otherwise have missed. And she has every right to spend her money that way…just not at taxpayer expense. That’s the lesson.
Of course Tax Court chronicler Lew Taishoff was on this while the electrons were still excited noting the brevity of Judge Foley’s opinion in his piece titled Judge Posner Would Approve.
Like Judge Ruwe in my blogpost “Amen, Judge Posner,” 12/22/16, Judge Foley eschews factors, “somber reasoning and copious citation of precedent” and the usual laborious trudge through Reg. 1.183-2 (which Judge Posner characterized as “goofy”) in Joy Ford, 2018 T. C. Memo. 8, filed 1/25/18.
“Petitioner maintained incomplete handwritten ledgers and sporadically retained receipts relating to Bell Cove’s expenses. Her records, however, bore no relationship to the income and expenses reported on her returns.” 2018 T. C. Memo. 8, at p. 3.
Joy talked to a television producer to try to do a show from the club, but that was just talk, and Joy didn’t follow the advice of business experts who told her to run a proper seafood restaurant.
So Judge Foley don’t need no stinkin’ factors.
I have a special affection for Mr. Taishoff as he is the only blogging buddy that I have met in meat space. One of the characteristics of his blog that I have been inspired by is noting the Tax Court judges as individuals, some of whom he gives colorful monikers. His other strength is pop culture references for the elderly. The “no stinkin’ factors” was pretty easy – The Treasure of the Sierra Madre