In Uncategorized on 02/15/2018 at 16:46

Judge Buch has a busy day with designated off-the-benchers. Here, he paints the picture of an artist of many talents, Collin S. Pulsipher, in Collin S. Pulsipher & Marcella P. Pulsipher, Docket No. 5409-17S, filed 2/15/18.

“Mr. Pulsipher considers himself to be a professional artist. What he means by that is that he is a man of many talents and interests, all of which broadly fall into the arts. He has worked in fashion. He has worked as a musician. He has worked on set design. As relevant to…the year in issue, he was employed on production sets. He was also winding down his involvement in a band. And he was taking. the initial steps toward pitching a reality TV show.” Order, transcript, at p. 4.

Collin’s idea for the reality TV show brings to mind a 2004 film that won an Oscar for best song, sung on Oscar night by a former client of a firm with which I was then associated. Collin was going to do a motorcycle excursion with a camera attached. Judge Buch isn’t certain whether this was business or pleasure, but it doesn’t matter since the concept never went anywhere. And IRS disallowed all of Collin’s business-type deductions.

“The bulk of Mr. Pulsipher’s expenses are related to the preliminary steps he took to develop a reality show. Generally, expenses under section 162 are deductible to the extent that they relate to a functioning business at the time the expenses were incurred. A functioning business is one that is performing the activities for which it ïs organized. The bulk of Mr. Pulsipher’s expenses are related to the preliminary steps he took in developing a reality show, and not his income as a musician. Because those expenses are not related to a functioning business, they cannot properly be offset against his income as a musician.” Order, transcript, at p. 7. (Citations omitted).

And as start-up expenses, these items, though documented to some extent, are a nonstarter.

“To the extent his expenses relate to a new business, section 195 disallows business expenses for start-up expenditures. A start-up expenditure is any amount paid or incurred in connection with: (1) investigating the creation or acquisition of an active trade or business (2) creating an active trade or business, or (3) any activity engaged in for profit and for the production of income before the day on which the active trade or business begins in anticipation of such activity becoming an active trade or business. In all instances, the amount in question must be allowable as a deduction in the case of an existing active trade or business. Because the reality show was a new venture and not an active business, Mr. Pulsipher’s expenses are not deductible under section 195.” Order, transcript at pp. 7-8. (Citations omitted).

But all is not lost. Judge Buch lets Collin have his drumsticks, lyric books and studio rental deductions. Section 274 strictures don’t apply, and Collin did make a few bucks as a musician.

And Collin & Marcella avoid one of the chops. IRS asserted the five-and-ten (understatement of tax of $5000 or 10% of tax, whichever greater); but that must await the Rule 155 beancount.

In the alternative, IRS wants negligence. However, the issue here wasn’t recordkeeping or substantiation.

“…the expenses that have been disallowed were not disallowed for lack of substantiation. The expenses were disallowed because start-up expenses for a reality show were improperly aggregated with the income from being a musician. Mr. Pulsipher credibly testified that he discussed these expenses with his return preparer. We understand from Mr. Pulsipher’s testimony that it was the return preparer who aggregated those expenses. On this record, we cannot say that Mr. Pulsipher was negligent. We need not reach the issue of the quality of his substantiation.” Order, transcript, at pp. 9-10.

Bang the drum and blame the preparer. It works, sometimes.


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