Country music teaches us lots of tax lessons. Here’s a list of country music songs about taxes. I especially like Johnny Cash’s lesson about the difference between gross pay and net pay in “After Tax”:
You can dream about a honeymoon for two
You can dream but that's about all you can do
'Cause by the time old uncle Sam gets through with you
You can buy her a pair of hose
A little powder for her nose
And take her down to Sloppy Joe's for beer and stew
Them are the facts after tax
The folks who sing country music also teach us many lessons about basic principles of taxation. One day I’ll blog the classic Jenkins v. Commissioner. Today, however, I draw your attention to last week’s Joy Ford v. Commissioner, T.C. Memo. 2018-8 (Jan. 25, 2018). Its lesson fits well with standard country music themes about love and broken dreams, about making money and making friends. Details below the fold.
Ms. Ford was a country music performer who was married for many years to Sherman Ford, a successful music producer and record company owner. How successful? Well, successful enough so that after Mr. Ford’s death in 1999, Ms. Ford was able to receive significant yearly income from the trusts he set up for her benefit. During the three tax years at issue (2012, 2013, and 2014), she received distributions of between $180,000 and $190,000, as well as between $6,000 and $30,000 in capital gains for each of the three tax years at issue.
In the 1980’s the Fords bought the Bell Cove Club property in Hendersonville, Tennessee, a city just outside Nashville. They wanted the Club to be an incubator venue for budding songwriters and singers. Ms. Ford continued to operate the club after Mr. Ford’s death.
The club never made money. The Tax Court noted that on her returns between 2008 and 2014, Ms. Ford consistently reported losses as follows: $34,889 in 2008; $67,249 in 2009; $66,016 in 2010; $41,801 in 2011; $39,285 in 2012; $74,120 in 2013; and $96,893 in 2014. The reason for the losses was that Ms. Ford opened the club only on weekends and would pay each performer $500 but charge only a $5 cover and nominal charges for snacks. She paid all expenses from her personal checking account. Over the years Ms. Ford took a couple of stabs at turning the activity into a business: she met with a TV producer to discuss creating a show, and she received advice to turn Bell Cove into an actual restaurant. None of that happened. It continued to be a money-losing weekend venue opportunity for nascent talent.
It takes money to make money and §162 generally allows the money spent to be deducted from the money made. It also takes money to effectuate personal desires and dreams. For example, in one of my favorite short stories, the money that the fictional Harry Belton spends to hire an orchestra to help him realize his dream of performing Mendelssohn’s Violin Concerto is a personal expense. Section 262 denies deductions for personal expenses. Congress gave taxpayers some relief from the harshness of §262, however, in §183. That section, allows taxpayers to deduct otherwise non-deductible personal expenses against any income the personal activities happen to generate. But it forbids taxpayers from taking a net loss and so it is known as the “hobby loss” section.
On these facts Judge Foley had no difficulty finding that §183 applied. It denied Ms. Ford the ability to deduct any Bell Cove Club expenses in excess of receipts. Just because she had folks pay a cover charge did not make it a business. He found that operating the Bell Cove Club was a personal expense because it “elevated petitioner’s status in the country music community, allowed her to further the careers of young performers, offered her weekly opportunities to interact with country music fans, and satiate her love for promoting country music.”
So it was love of music, and not love of lucre, that made Ms. Ford spend her money to keep Bell Cove Club going. No doubt her efforts have enabled many to enjoy music they might otherwise have missed. And she has every right to spend her money that way...just not at taxpayer expense. That’s the lesson.
Coda: Judge Foley refused to impose the §6662 negligence penalty against Ms. Ford. But his refusal was not based on the merits of the case. It was instead based on the Tax Court’s new approach to applying §6751, announced in Graev v. Commissioner, 149 T.C. No. 23 (Dec. 2017). That statute requires that before the negligence penalty (among others) may be assessed, the "initial determination" to impose the penalty must be "personally approved" by "the immediate supervisor of the individual making such determination.” The Tax Court now takes the position that this language means the IRS must prove the approval was made before the Notice of Deficiency was issued. So Ms. Ford got a lucky break there. The Procedurally Taxing crew has been carefully covering this issue for well over a year. Here’s a good post to start with if you are interested.