Last October, artists everywhere won a victory against the IRS. The United States Tax Court held that the IRS had incorrectly ruled that an artist’s profession was merely a hobby and that any assessment of back taxes and penalties was improper.

A brief background on business tax. As many of you know, you must pay tax on all of your income. All of your income before taxes is your gross income. However, businesses are allowed to take deductions for the cost of doing business against their gross income before income taxes are assessed. In order to prevent abuse of the system, the IRS has the ability to rule that a particular activity is merely a hobby and is “an activity not engaged in for profit”. When an activity is merely a hobby, the expenses cannot be deducted from the income. As you can imagine, many an artist’s profession has been labeled as merely a hobby by the IRS. And unfortunately, the tax code is written in such a way that the burden is on the artist to prove otherwise. Susan Crile, an artist and tenured professor of studio art at Hunter College fought the law…and she won.

In Crile v. Commissioner, the IRS made two arguments in support of their ruling: (1) that Crile’s work as an artist was “an activity not engaged in for profit” (a hobby) and alternatively (2) that even if she was engaged in an activity for profit, her deductions were not “ordinary and necessary”. The tax court split the two arguments to consider them separately, and only focused on the first. We shall have to wait on the second.

Given Crile’s impressive resumé, it is shocking and frankly disturbing that the IRS considered it to be a hobby. Her career spans 40 years, her works are part of the permanent collection of 25 museums, including the Met, the Guggenheim, and the Brooklyn Museum of Art. She has created over 2,000 works of art. Her work has been purchased by the Library of Congress, the Federal Reserve, Texaco, Exxon, AT&T, Bank of America, and other large corporations. She actively marketed her work and was represented by several well-known galleries. The Court noted that her business records were not 100% complete, but that was a result of incomplete sales information from galleries, as opposed to her own failure. (Vague sales records by galleries is a whole other topic.) She obtained her position at Hunter College because of her credentials. Hunter College’s tenure track positions are extremely competitive as it is one of the top tier arts colleges in the nation.

So how was it that the IRS came to the determination that her profession was merely a hobby? It was a combination of two factors: her full-time employment as a professor at Hunter College combined with the fact she had taken business losses for a handful of years.

What the IRS fails to realize is what they consider to be red-flag behavior is perfectly normal in the art world. Income from the sale of art is unpredictable. One good month could be followed by several months of no income. It is hardly unusual for an artist to have another job in order to have a steady source of income. This scenario hardly means that an artist is not serious about her work.

Luckily for Crile, the Tax Court agreed. It stated that while she had the burden of proving that her “predominant, primary, or principal objective” was to earn a profit, “a reasonable expectation of profit is not required.” The Court laid out the following factors it considered to determine whether her primary objective was to earn a profit:

A.  Scope of Activity. This includes looking at:

(1)   “The degree of organizational and economic interrelationship of various        undertakings;

(2)       The business purpose which is (or might be) served by carrying on the various undertakings separately or together; and

(3)       The similarity of various undertakings.”

The IRS had argued that her position as a professor of art and her position as an artist were one and the same. However, the Court held that the evidence showed that her position as an artist was entirely separate from that of her role of professor.

B.  Intent to Earn a Profit. This includes looking at:

(1)       “The manner in which the taxpayer conducts the activity;

(2)       The expertise of the taxpayer or her advisers;

(3)       The time and effort spent by the taxpayer in carrying on the activity;

(4)       The expectation that assets used in the activity may appreciate in value;

(5)       The success of the taxpayer in carrying on other similar or dissimilar activities;

(6)       The taxpayer’s history of income or losses with respect to the activity;

(7)       The amount of occasional profits, if any;

(8)       The financial status of the taxpayer; and

(9)       Elements of personal pleasure or recreation[.]”

None of these factors are controlling, nor is this a balancing test in which the plaintiff has to show she meets the majority of the factors. The Court notes that based on the factor and the activity, one factor could be given more weight than another. After exploring each factor carefully, the Court found that they weighed in favor of Crile.

I am very pleased that the Court found in favor of Ms. Crile. What I find deeply disturbing is that this is an artist who is clearly established in the art world and yet she had an immense uphill battle to prove that her profession was not merely a hobby. What about those who are new to the art world—those new and emerging artists, who are also committed to a career as an artist but clearly do not have the resumé that Crile has? Do they run the risk that their profession will be labeled a “hobby” by the IRS simply because they haven’t had the chance to establish themselves? I don’t have the answer for this. But at least Ms. Crile has given us the groundwork.