TAX COURT FINDS INCOME FROM AUTHOR’S BRAND SUBJECT TO SELF-EMPLOYMENT TAX

Posted by Kim Chen on August 18th, 2019

Slaughter, TC Memo 2019-65
The Tax Court held that a successful author’s brand was part of her trade or business. As a result, all of her income from her publishing contracts was derived from her trade or business of being a writer and was subject to self-employment tax.
Background. Code Sec. 1401(a) imposes a tax on the self-employment income of every individual. Code Sec. 1402(b) defines “self-employment income” as “net earnings from self-employment”. Code Sec. 1402(a) defines “net earnings from self-employment” in pertinent part as “the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by the Code which are attributable to such trade or business”. The term “derived”, in turn, requires a nexus between the income received and a trade or business that is, or was, actually carried on. (Newberry, (3/17/1981) 76 TC 441)
In general, investment income isn’t subject to self-employment tax.
Facts. Ms. Slaughter was a successful author who received substantial royalty income pursuant to several publishing contracts. She spent time and money on building her personal brand as an author above and beyond merely writing books. Her promotional activities and writing created a very successful brand and body of work. In Slaughter’s case, her brand included her name and likeness as well as her reputation, goodwill, and existing readership. Book buyers walk into book stores and request her books using her name rather than the title. In addition, she has developed good relationships with booksellers and librarians, which help to sell her books. She also maintains contact with her readership through social media, websites, and a newsletter.
She entered into standard contracts with publishing companies allowing them to market and sell her books. She was paid in various ways. Some of the contract’s payments were called advances; others were titled royalties. As is usual in the industry, the contracts did not allocate the advances or royalties between writing the works, promoting the works, noncompete clauses, or exclusive options.
Ms. Slaughter hired a CPA to prepare her tax returns. The CPA determined that a portion of her income should be allocated to investment income, i.e., payment for an intangible asset beyond that of her trade or business as an author. Thus, the CPA concluded that Slaughter should pay self-employment tax only on the amount that publishers paid her for writing and not on amounts paid for her name and likeness.
IRS contended that all of the payments the author received from her publishing contracts during 2010 and 2011 were derived from her trade or business as an author.
Tax Court decision. The Tax Court agreed with IRS.
The author argued that the payments for her brand were separate and distinct from payments for her trade or business of writing. She contended that this was the case even when both types of payments were made by one payor. She cited Rev Rul 68-499, 1968-2 CB 421, in support of both of her contentions. The revenue ruling discussed a company paying royalties to certain individuals who were also employed by the company. On the basis that the licensing contracts were separate and distinct from the employment contracts, the revenue ruling concluded that the royalties were not paid for services performed by the individuals, that they were not “wages”, and that therefore they were not subject to payroll taxes.
The author tried to apply the revenue ruling by analogizing earned wages (earned by the employees in the revenue ruling) to net earnings (earned by the author), and payroll taxes (paid by the company in the revenue ruling) to self-employment tax (paid by the author). She contended that the rev ruling’s conclusion should be applied to her case.
The court found that the author’s reliance on Rev Rul 68-499 was misplaced. The author’s analogy failed because it attempted to adapt out-of-context definitions of employment to the definition of trade or business income under Code Sec. 1402. Code Sec. 1402 provides that “net earnings from self-employment” includes income derived from any trade or business. An allocation within the author’s contracts is beside the point if all elements are to be allocated to a trade or business.
The court concluded that Slaughter’s brand was part of her trade or business. It construed “trade or business” broadly. Examining all of the facts, it found that her trade or business included her brand since she was engaged in developing her brand with continuity and regularity for the primary purpose of income and profit.
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