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    Georgia Author Loses Self-Employment Income Case

    Fans of best-selling crime author Karin Slaughter can’t wait for the release of her Netflix series, Pieces of Her. The author, an Atlanta native who has sold a reported 35 million copies of her books worldwide, is known for dark and edgy crime novels, many set in Georgia. Part of the upcoming Netflix series was filmed on St. Simons Island in July 2021.

    Not only is Slaughter gutsy in her creative endeavors, but she also showed a certain daring in taking on the IRS in a recent, failed court challenge to a $190,000 tax deficiency. In Slaughter v. Commissioner, the 11th Circuit Court of Appeals in Atlanta affirmed an earlier Tax Court decision (TC Memo 2019-65) that Slaughter had underreported her earnings from self-employment by only including as business income the portion of her publishing income from the physical labor of writing. She claimed the rest as supplemental income not subject to the self-employment tax.

    What’s Included in the Business of Writing?

    Slaughter argued that only part of her income for her “writing services” should be subject to self-employment tax and that marketing and licensing fell outside that trade or business. The IRS argued that Slaughter’s entire income from her publishing contracts was subject to self-employment tax because it was derived from her trade or business. It further argued that payments to Slaughter for various intangible assets were subject to self-employment tax because those rights were a part of her trade or business.

    As the Court notes, the term “net earnings from self-employment” means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions . . . attributable to such trade or business. The taxpayer is engaged in a “trade or business” if the taxpayer is involved in the activity “with continuity and regularity and that the taxpayer’s primary purpose for engaging in the activity must be for income or profit,” the Court observed.

    Business Expense Deductions a Problem

    Slaughter’s prior business-expense deductions also support treatment of the entire amount as self-employment income. The Court noted that Slaughter took business expense deductions for the following items relating to her promotional activities:

    • rent for Slaughter’s New York apartment that she used when going to trade shows and meetings with publishers
    • payments for a car— which was the same model used by her main character Sara Linton—that she drove to interviews and promotional and networking events
    • catering expenses and gifts for business associates
    • expenses for advertising, her website, and promotions

    The Court concluded that the fact Slaughter deducted these expenses ”illustrates that the promotion of her written work was part of her writing business.”

    Slaughter escaped the imposition of negligence penalties, with the Court finding that she had reasonably relied in good faith on the advice of professional advisors.

    Broad View of Net Earnings from Self-Employment

    The lesson for taxpayers here is that the IRS and the courts read Code Section 1402 to favor treatment as earnings from self-employment when a taxpayer is engaged in business, especially those based on the taxpayer’s creative efforts. Another caution is that taxpayers should not take inconsistent positions on their returns. Slaughter’s business expense deductions for activities relating to the promotional and networking events were inconsistent with her position that income derived from those activities were royalties, not self-employment income.

    The only remaining question is whether Slaughter’s experience with the tax system will result in some kind of a tax-related murder mystery!

    Recent Conversations with Slaughter

    If you are interested in hearing more about Slaughter’s publishing activities and new Netflix series, here are links to her recent appearances on NPR and on Political Rewind.

    NPR Conversations

    Political Rewind

     

    About the Author

    Lucia Nasuti Smeal is a guest blogger on tax topics for Frazier & Deeter. Smeal is an attorney, an adjunct tax professor with Georgia State University’s J. Mack Robinson College of Business and with Franklin University, and former editor of Tax Notes Today, published by Tax Analysts. Smeal also worked as a legislative analyst for the Congressional Research Service and is a former member of the U.S. House Periodical Press Corps. She is a frequent speaker and writer on current tax developments

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