In K. Slaughter v. Commissioner, T.C. Memo. 2019-65, an opinion issued by the U.S. Tax Court today, K. Slaughter (aka Karin Slaughter) the author of Snatched, Busted, The Truth About Pretty Girls, Like a Charm, and Necessary Women and The Mean Time (Short Stories), was found liable for employment taxes, but not accuracy-related penalties, for 2010 and 2011. The full PDF opinion can be found here https://taxattorneyoc.com/author-k-slaughter-tax-court-opinion-tc-memo-2019-65/ .
In asserting that a portion of income from her contracts was not subject to self-employment tax, the opinion states that the author made the following argument:
Petitioner contends that the payments for her brand are, contrary to respondent’s contention, separate and distinct from payments for her trade or business of writing. She furthermore contends that this is the case even when they
are made by one payor and that these distinct payments are not trade or business income. Petitioner cites Rev. Rul. 68-499, 1968-2 C.B. 421, in support of both of her contentions. Rev. Rul. 68-499, supra, discusses a company paying royalties to certain individuals who are also employed by the company. On the basis that the licensing contracts are separate and distinct from the employment contracts, the revenue ruling concludes that the royalties are not paid for services performed by the individuals, that they are not “wages”, and that therefore they are not subject to payroll taxes. Id.
Analogizing earned wages to net earnings, and payroll taxes to self-employment tax, petitioner contends that the conclusion in Rev. Rul. 68-499, supra, should be applied to her case. Specifically, she contends that payment for the writing of a manuscript is payment for a service; wages have been defined as payments made in exchange for services, sec. 3121(b); Milligan v. Commissioner, 38 F.3d at 1099 n.7, and therefore, by analogy, payment for such a service should
be subject to self-employment tax just as wages are subject to payroll taxes. In contrast, payment for something other than a service, such as the licensing royalties, is not a wage, see Jones v. Commissioner, T.C. Memo. 1998-354, so the
separate and distinct payment for petitioner’s brand should not be subject to self-employment tax.
However, the court rejected that argument, and found that reliance on Revenue Ruling 68-499 was misplaced, stating:
Petitioner’s analogy fails because it attempts to adapt out-of-context definitions of employment to the definition of trade or business income under section 1402. We are not able to focus solely on the words “net earnings” to the exclusion of the words “trade or business”. The statute provides that “net earnings from self-employment” includes income derived from any trade or business. An allocation within petitioner’s contracts is beside the point if all elements are to be allocated to a trade or business.
The court concluded that K. Slaughter’s brand was part of her trade or business, stating:
We construe “trade or business” broadly, and, examining all of the facts, find that petitioner was engaged in developing her brand with continuity and regularity for the primary purpose of income and profit. See Jones v. Commissioner, T.C. Memo. 1998-354; Dacey v. Commissioner, T.C. Memo. 1992-187; Hittleman v. Commissioner, T.C. Memo. 1990-325.
The court found K. Slaughter liable for self-employment taxes in both years, but found that she was not liable for penalties due to “reasonable cause,” having hired several qualified professionals to prepare her returns, providing them everything they requested.
Posted by Daniel W. Layton on 06/04/2019.