Question

What are the issue and court decision for TC Summ. 2016-10, Fisher v. Commissioner?

Answer 1

In Fisher v. Commissioner, T.C. Summary Opinion 2016-10, an attorney discovered that just because you say you're writing a book does not make all of your "research expense" deductible.

The taxpayer was a practicing attorney with three small children. At the request of a client, she was asked to travel to the Czech Republic. Because no day care was available, she chose to bring the kids along. Worried about what to do with the children on such a long trip, the taxpayer decided to write a children's travel guide to the Czech Republic that, she hoped, would "keep the kids busy."After the trip was over, the taxpayer decided to expand her vision for her children's book into a series of travel guides to locations throughout the U.S. and abroad. Before traveling to any destination, the taxpayer would write a rough draft of the travel guide, and then fill in the more interesting details while on her trip.She took the kids to Disney World as well as several European cities, arguing that the trips constituted "research." In all, she developed four "prototype books," and while she was able to sell a few of the unpublished prototypes to friends and family who requested them, the taxpayer was never able to get any of the books formally published.

On her tax returns for the three years under issue, the taxpayer reported a total of $479 of income from the book-writing activity, but $72,000 of expenses, largely in the form of travel and meals while conducting "research." As you might imagine, this $71,500 loss helped to offset the taxpayer's income as a practicing attorney and reduced her overall tax burden.

The IRS came calling, however, and denied all but $479 of the expenses (allowing the taxpayer to reduce income from the activity to zero, but not below), arguing that the book-writing activity was not entered into for profit.

The tax law will only permit you to deduct a loss from an activity if it is entered into with the intent of making a profit. If no such intent is shown, the activity is classified as a "hobby,' and expenses may only be deducted to the extent of any income derived from the activity.

In Fisher, the IRS argued that the taxpayer had no profit motive with the book-writing activity, and thus was not eligible to deduct a loss. Citing the hobby loss rules of Section 183, the IRS noted the lack of income, the elements of personal recreation inherent in the activity, and the taxpayer's use of the resulting losses to offset income from her day job. These same factors often serve to deny losses for taxpayers involved in multi-level marketing programs such as Beachbody, Rodan & Fields, and Silpada.

The Tax Court sided with the IRS, but interestingly, refused to apply the hobby loss factors of Section 183. Instead, the Service took a more direct approach to denying the book-writing deductions, concluding that while the activity might eventually evolve into a for-profit business, it certainly hadn't done so during the years at issue. During that period, the taxpayer had not hired an agent, had not finalized any of her books, and had not yet submitted any proposals to a publishing company. As a result, the court concluded that her activity for the three years could best be described as "research in connection with a business she had in mind," and because there was no business, no deductions were allowed.