On July 20, 2004, the United States Tax Court filed an opinion for the case, Calarco v. Commissioner. The opinion is impressive in that it clearly creatively explains the law demonstrating that opinions can be entertaining and informative. Before the "Prologue" the opinion begins with an apt quote from Henry VIII, "Taxation! Wherein? And what taxation?"
The Prologue section shows how "tax law has been a fount of literature for 5,000 years." In it the Judge is able to discuss such a wide range of literature from Gilgamesh (which everyone ought to read, today) to Gulliver's Travels to A Tale of Two Cities. All of which point out possible changes to tax policy. The Judge then shows his appreciation for fun, witty, and one of my favorite musicals: Urinetown (to pee you have to pay the proper fee). Many authors are cited as working as tax collectors (Chaucer, Thomas Paine, and Nathaniel Hawthorne). The history of tax law and creative forces is saluted by this opinion.
I believe that the court correctly decided the issue of whether this taxpayer was engaged in playwrighting for profit. However, I think that part of the analysis was unfair to writers. The taxpayer in this case was a phD professor at Wayne State University. He taught in the theater department while writing plays in hopes of making it. It is a costly pursuit that can only have a deduction if it is considered a trade or business.
Using tax code regulations the court was able to weigh factors in determining if the claim of profit motive was merely a pretext. In my opinion the court gets most of the analysis of the factors correct. However, the eighth factor seems to be too quickly dismissed.
The eighth factor is the financial status of the taxpayer. The regulations provide that an absence of substantial income to the taxpayer from other sources may indicate a profit motive, while the presence of other substantial income may indicate a lack of profit motive. This is particularly true if the activity has personal or recreational elements. This factor does weigh against petitioner, as his primary income is from his teaching position, and allowing his playwrighting deductions would largely offset his teaching wages.
Does the Judge treat the "may" like a "shall"? Some playwrights work a job to make ends meet while they wait for their dream of being performed and profit making to come true. Writing, in this case, could still be considered to have a profit motive despite the fact that their day job provides "substantial income."
That is my only issue with the analysis of the first issue. The second and third issue are more involved in substantive (and complex) tax law. I encourage everyone to read the prologue, analysis of the first issue, and epilogue of the opinion. You'll see an interesting discussion concerning what differentiates (for tax law purposes) writing as hobby and writing in hopes of profit. More importantly you'll see that court opinions do not have to be inaccessible and uncreative. Rather, they can be quite entertaining.
