A musician faced the unenviable task of representing himself and attempting to prove that his music activities, which had yielded a six-figure loss over the period from 2004-10, actually were a business with a profit motive. Despite the enormous expenses and minimal revenues, the U.S. Tax Court concluded that the evidence in the musician’s case pointed to a taxpayer attempting to run a for-profit business.
The musician, Thomas Gullion, split his time between music and computer software programming. The saxophonist’s music activities, during the period between 2004 and 2010, yielded only a little more than $13,000 in income, while racking up in excess of $130,000 in expenses, according to Gullion’s tax returns. The Internal Revenue Service took issue with two particular returns, 2008 and 2009, when the saxophonist allegedly incurred his heaviest losses. The IRS declared the returns deficient to the amount of just over $18,000, and assessed a 20% accuracy penalty.
The saxophonist contested the assessment before the Tax Court, arguing that, although his business had never even come close to logging a profitable year, his losses were not hobby losses, but were from a business designed to make a profit. The Tax Court agreed. The court looked at several key factors, listed in Section 1.183-2(b) of the Income Tax Regulations. These included Gullion’s music industry expertise which, the court decided, was considerable, noting that the taxpayer had played professionally since he was 16 years old. The court also concluded that the taxpayer devoted a sufficient amount of time and effort on his business, rebuffing the IRS’s contention that Gullion was a full-time software programmer who just played and composed in his free time. That the taxpayer did computer work did not necessarily prove that his music was a mere hobby, the court determined, stating that “a taxpayer may engage in more than one trade or business at any one time.” In Gullion’s case, the court pointed out that the taxpayer had spent extensive time on music, including recording four CDs and organizing a jazz festival.
Additionally, because the taxpayer’s business was in the arts, his history of steady, massive losses was less harmful than it might otherwise have been. The court expressly stated that “‘a history of losses is less persuasive in the art field than it might be in other fields’, as economic success in the arts, frequently takes longer to achieve than success in other fields.” In Gullion’s case, the court was persuaded by his evidence that his business suffered from the closing of several jazz clubs in nearby Chicago, and that he was forced to adjust the focus of his business from performing to composing original music.
With many endeavors, including the arts, it may be easy for the IRS to attempt to classify one’s independent business as a hobby. To ensure that your business is best prepared to withstand IRS scrutiny, reach out to the experienced tax attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C. They have years of experience and can help you with maintaining the proper records, business plan documents and other written information you need to survive an IRS examination. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.
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Photo Credit: Geoffrey Lowe and Tom Gullion at Wikimedia Commons.