In Uncategorized on 08/14/2013 at 17:34

No, not the 1975 Fred Ebb-John Kander song from “Chicago”, nor yet the 1979 Bob Fosse film, but rather the small-claimer from Thomas Allen Gullion, 2013 T. C. Sum. Op. 65, filed 8/14/13, with Judge Kerrigan on the bench and Tommy the Taxpayer on sax.

Tommy was a musician. “Petitioner began performing on the saxophone at the age of eight. He has played professionally since the age of 16. He attended Indiana University, where he studied under David Baker, a distinguished professor of music and jazz education. He also toured with J. J. Johnson, a master of bebop trombone.” 2013 T. C. Sum. Op. 65, at p. 3.

Tommy’s musical efforts yielded far less than his specialized design activities for the years at issue. In fact, over a seven-year span, he took in $13K from his Driftwood Jazz Festival in Southwestern Wisconsin and four CDs, but lost $130K.

IRS says “no” to two years’ worth of losses.

Now the Section 183 hobby-loss mambo is facts-and-circumstances, no single factor determinative and a mere head-count is necessary but not sufficient.

Tommy was regular and continuous: he blew that horn wherever and whenever. But did he want to, and try to, make a profit?

But instead of going through all the factors, Judge Kerrigan cuts to the chase. Tommy was certainly trained to be a musician and did play with J. J. Johnson, of J. J. and Kai fame, as those of us who staggered into our high school classes sleep-deprived from listening to Symphony Sid remember fondly.

“Petitioner was dedicated to his music career. He organized a jazz festival in Wisconsin and recorded four CDs, including ‘Carswell’ in 2009. Petitioner’s testimony was credible concerning the time he spent on his music career. We have recognized that a taxpayer may engage in more than one trade or business at any one time. It is also well settled that the term ‘trade or business’ includes the arts.”  2013 T. C. Sum. Op. 65, at p. 8. (Citations omitted).

I’m sure the shades of Da Vinci, Michelangelo, Rembrandt, El Greco, Velasquez and Van Gogh are pleased to be recognized as having practiced a “trade or business”, at least as far as Tax Court is concerned.

Moreover, “(P)etitioner testified that the music industry has undergone changes over the years and that it is now difficult to make a profit. He testified that many of the jazz clubs closed in Chicago and that there were not that many opportunities. He further testified that less money is made when a musician plays another artist’s music. Petitioner contends that he made changes so he can become profitable. Petitioner moved to Wisconsin in part because the cost of living was lower and because he could continue to travel to Chicago and elsewhere. For instance he will embark on a tour in Spain in summer 2013. He referred to his time in Wisconsin as rebuilding years and stated that he would like to be able to leave the software industry and pursue music full time. In addition petitioner wanted to change the course of his career, placing more emphasis on his own music and focusing on composing. He wants to leave behind a legacy of work.” 2013 T. C. Sum. Op. 65, at pp. 9-10.

It’s true Tommy lost a bundle, but Judge Kerrigan understands. “We have found 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. We believe that the arts include music.” 2013 T. C. Sum. Op. 65, at p. 10. (Citations omitted).

I’m sure the shades of J. S. Bach, G. F. Handel, W. A. Mozart, L. van Beethoven, and J. Brahms are pleased that music is included among the arts, and is therefore a “trade or business”, according to Tax Court..

IRS says that a $600 profit in a year not at issue, based on Tommy’s CD “Catharsis”, doesn’t erase $130K of losses over a seven-year stretch.

But Tommy, echoing the more successful songwriter Robert Alan Zimmerman, says “the times they are a-changin’”. “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. A result of this retooling was the CD ‘Catharsis’, which includes his original compositions.” 2013 T. C. Sum. Op. 65, at p. 10.

Judge Kerrigan says Tommy didn’t have a lot of income from other sources. But he did pretty well at his software designing, $103K in one of the years at issue, and $130K in the next. So maybe Judge Kerrigan thinks that a six-figure income is modest, after her years in a white-shoe Washington, D.C. law firm.

And though Tommy loved to blow his horn, that element of personal pleasure doesn’t negate a profit motive. You can have fun and make money.

Tommy gets nailed for some minor deductions, but he went to a fellow musician who is also a CPA and gave him all the records to do his taxes, so Judge Kerrigan knocks out all penalties.

Takeaway– If you represent artists, you can catch a break if the hits don’t just keep on comin’.


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