The taxpayer, a successful fictional crime author, received income for her books through contracts with publishers. The taxpayer was required to write and submit manuscripts for books and if accepted by the publisher, the taxpayer would receive a fixed advanced payment as well as royalties from sales exceeding her advanced payment.
The taxpayer also promotes and maintains her brand by maintaining contact with her readership through her website, interviews, publicity events, and her social media presence. The taxpayer has claimed business-expense deductions for all of those activities on her income tax returns.
For the relevant years, the taxpayer received income of USD 5.4 million and USD 3.6 million from her publishing work. She divided the income between business and non-business income using a rough calculation of the dates she spent writing.
The taxpayer argued the majority of income received from her publishing contract was for activities other than the time spent writing books. She stated that payments for activities other than writing a book was not income from a trade or business for self-employment tax purposes.
The IRS disagreed, arguing all of the income received by the taxpayer was derived from her trade or business of writing books. The Tax Court agreed with the IRS, holding all of the taxpayer’s publishing income was subject to self- employment tax because her brand, her promotional activities to promote it, and the licensing of most of her intangible assets were part of her trade or business.
The taxpayer appealed to the Court arguing the Tax Court erred because the IRS conceded her trade or business included only the act of writing and not any promotional activities. However, the Court disagreed and affirmed the Tax Court decision.
The Court explained, that generally speaking, it considers “[t]he term ‘self- employment income’ to mean the gross income derived by an individual from any trade or business carried on by such individual, less such individual’s deductions...attributable to such trade or business from self-employment.” Further, the Court noted, “the self-employment tax provisions are broadly construed to favour treatment of income as earnings from self-employment.”
Then, before turning to taxpayer’s argument that most of her publishing income is not subject to the self-employment tax, the Court addressed the issue of whether the taxpayer was in the trade or business of writing only. The Court concluded that the taxpayer was not for the following two reasons:
- the IRS always made it clear that although it agrees that the taxpayer’s business was writing, it disagrees to accept her very narrow definition of what constitutes writing; and
- the taxpayer’s view of the record would make the litigation unintelligible because if her trade or business did not include promotional activities, as she was trying to claim, her previous attempts to litigate that issue would have been pointless because there would have been nothing to litigate.
The Court concluded that the Tax Court did not err in finding the taxpayer’s trade or business included promotional activities in 2010 and 2011 and that her promotional activity is continuous and regular, and not sporadic or hobby-like, as represented by the taxpayer, and therefore should be part of her trade or business. The Court reviewed the Tax Court's findings under the standard of clear error, and argued that to determine whether an activity is “sufficiently continuous and regular” for a trade or business purposes, a trade or business “requires an examination of the facts in each case.” The Court continued, the taxpayer’s prior business-expense deductions such as rent of apartment used when going to trade shows and meeting with publishers, payments for a car, catering expenses and gifts for business associates, expenses for advertising her website, and “promotions” amply support the Tax Court’s finding that these activities are sufficiently continuous and regular.
The Court further reasoned the taxpayer could not have claimed deductions for those expenses unless they were paid or incurred “in carrying on any trade or business.” Per the Court, the fact the taxpayer deducted these expenses illustrates that the promotion of her written work was part of her writing business. Additionally, the Court stated the promotion and sale of books is a key factor distinguishing a writing business, which one engages in for income and profit, from a writing hobby.
The Court also found that the Tax Court did not err in finding all of the taxpayer’s publishing income in 2010 and 2011 was derived from her trade or business. The Court explained that for self-employment income to be derived from a trade or business, “there must be a nexus between the income received and a trade or business that is, or was, actually carried on.” Additionally, “the income must arise from some actual income-producing activity of the taxpayer before such income becomes subject to self-employment taxes.” Nonetheless, “[t]he self-employment tax provisions are broadly construed to favour treatment of income as earnings from self-employment.”
The Court declined to apply the Ninth Circuit’s quantity-or-quality test. Per Ninth Circuit case law, in order to subject a taxpayer to self-employment tax, there should be a nexus between that income and trade or business, while the nexus test is satisfied only if the “earnings [are] tied to the quantity or quality of the taxpayer’s prior labor, rather than the mere fact that the taxpayer worked or works for the payor.” The Court claimed the decision of the Ninth Circuit is specific to post-termination payments to insurance agents and therefore nonbinding. The Court continued by arguing that even if the Ninth Circuit’s test did apply, all of the taxpayer’s publishing income—including the portions from her intangible assets would satisfy the requirements of the test. According to the Court, if the taxpayer, who is a famous author, ceased to write or promote her books, her brand and success as an author would be affected. Furthermore, if she were not writing books, publishers would pay less—or even nothing—for her name and likeness, access to her readership, the right to use her characters, and her agreements not to compete.
The Court refused to accept the taxpayer’s argument that her name and her likeness and their licensing “can[not] be reasonably described as used predominantly for profit rather than as a personal right, by arguing that although she is correct a trade or business activity must be primarily profit-motivated, there is no reason to believe that a long time bestselling author who has earned millions of dollars from her books, licensed her name and likeness for use on books and related materials for any purpose other than increasing her profit.”
Finally, the Court declined to accept the taxpayer’s argument that income from an agreement not to compete does not derive from a trade or business by saying that unlike in the case of “a one-time agreement not to engage in certain activities”, her activity had “the kind of continuous and regular activity” characteristic of a trade or business. Taxpayer’s noncompetition agreements were not one-time events—noncompetition clauses appeared in every American contract that she signed.
Moreover, the clauses for the most part did not prevent the taxpayer from writing for other publishers—they merely required her to complete the contracted books first. Consequently, the Court ruled the Tax Court did not err in determining that the taxpayer’s income from her noncompetition agreements was derived from her trade or business. Accordingly, the Court concluded that the Tax Court did not err in determining that all of the taxpayer’s publishing income in 2010 and 2011 was derived from her trade or business.
Potential future applications
It is clear that income from promotional activities may now become subject to self-employment tax in other jurisdictions due to the Eleventh Circuit holding an individual’s brand, promotional activities related to brand awareness, and licensing of intangible assets are part of an individual’s trade or business.
While the Slaughter case addressed an author’s activities promoting her books, the reach of the Eleventh Circuit’s decision could be far greater. Promoting one’s brand through social media and audience outreach has been increasingly used by professionals in every industry. As a result, it is possible and even likely that the IRS will now deem income earned from promotional activities through different facets such as social media to be subject to self-employment tax as part of an individual’s trade or business.
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