Stevie Nicks 1996 Journal of Taxation article...

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I found this on WestLaw...hope you guys enjoy..I hope this hasn't been posted before.

Journal of Taxation
Volume 87, Number 1
July, 1997

Shop Talk

'ORDINARY AND NECESSARY' BUSINESS EXPENSES FOR ENTERTAINERS: WHAT'S
REASONABLE?


Electronic Version Copyright © 1997 Warren Gorham & Lamont

The gross incomes of top-level entertainers, athletes, CEOs, and other "stars" who are paid for providing services have gone through the roof in the past few years. What is reasonable compensation?
As we previously reported, Florida Marlins pitcher Alex Fernandez, who has never won 20 games in a year, is being paid $36 million for five years (roughly $180,000 for every game pitched, win or lose), and basketball's Juwan Howard, an excellent but not spectacular young power forward, is receiving $101 million over seven years from the Washington Bullets. See Shop Talk, "Want to Sign Free Agents? Lower Your State Taxes!," 86 JTAX 127 (February 1997). Comedian-actor Jim Carrey reportedly makes $20 million (cash salary) for each picture he makes. The Chicago Bulls' Michael Jordan is being paid $30,140,000 for one year (playing about 100 basketball games), and the consensus is that he is worth every cent of the $7,500 per minute he gets. The Eagles, a country-rock band sans hit in almost a decade, not long ago grossed over $100 million on their "Hell Freezes Over" tour. Some CEOs of Fortune 500 companies make millions each year in salaries and stock options.
All of these amounts are arm's-length payments made by employers or the public for services rendered-and with the possible exception of superstar Michael Jordan, none of the are "unique" services. Yet there is no disagreement as to the deductibility of these payments by employers as being "reasonable" and "ordinary and necessary." (Since the recipients presumably are reporting the same amounts as taxable income, the federal fisc apparently comes out no worse than even by allowing such deductions.)
Thanks to these mind-boggling incomes and the sociological studies of Robin Leach, we expect all these stars to have lifestyles befitting the rich and famous. Yet the expenses incurred by star earners are rarely reported. If the star is an independent contractor engaged in a trade or business, the expenses are deductible (on Form 1040, Schedule C) to the extent that they are "ordinary and necessary" expenditures directly connected with or pertaining to the taxpayer's trade or business (see Reg. 1.162-1(a).) In addition, a business expense also must be "reasonable" (see, e.g., Lincoln Electric Co., 162 F.2d 815, 38 AFTR 411 (CA-6, 1947)). The determination of whether an expense is reasonable depends on the facts and circumstances.
What is "ordinary and necessary" or "reasonable" in the context of these gazillionaires? Providing a chauffeured luxury car to an employee has been held to be not extravagant given the nature of the employment (a secuirites investment advisor), the wealthy investors tranported, and the congested area in which the car was driven, in Denison, TCM 1977-430.. In contrast, a plastic surgeon was denied a deduction for expenses relating to his leasing of a Rolls-Royce where he failed to establish it was leased for business purposes, in Connelly, TCM 1994-436. The IRS does not rule on factual matters, and it apparently has been many *64 moons since the last widely reported case dealing with the deductibility (including reasonableness) of expenses incurred by actors, musicians, and other entertainers.
**2 A hint of the business expenses claimed by the rich and famous was provided in the Tax Court petition (Docket No. 22733-96, filed 10/22/96) for Stephanie Nicks (known as Stevie Nicks to her fans). One of your editors, who some years ago paid big bucks to see her as the headliner in a Chicago concert, was particularly interested in certain unusual items claimed but disallowed on her 1991 income tax return. Indeed, Ms. Nicks's petition (responding to an IRS notice of an $85,887 deficiency) provides insight into the "ordinary and necessary" expenditures that some entertainers incur and implicitly believe to be "reasonable." The former Fleetwood Mac chanteuse claimed business expenses of $268,987 on Schedule C of her 1991 Form 1040 that were disallowed on audit, consisting of:
1. $60,160 to maintain a business office in her home.
2. $12,495 for makeup and hairstyling.
3. $43,291 for professional ward-robe and maintenance.
4. $119,291 paid to her personal manager.
5. $33,750 characterized as "video costs."
There may have been additional business expenses that were not disputed by the IRS, but these are not revealed in the petition.
Ms. Nicks's status, according to the petition, is a "songwriter, poet, literary artist, musician and visual artist" whose business activities include composing, arranging, and rehearsing her songs; composing her poems and literary art; drawing, painting, and creating other forms of visual art; communicating with her professional advisers, including her personal manager, business manager, agents, lawyers, producers, record company executives, and fellow musicians; "and otherwise conducting her affairs to promote her trade and create new forms of expression for her ideas." In light of these activities, one might better understand that Ms. Nicks claims a portion of her residence, including outdoor portions of her residence (clearly defined, separately identifiable, and allegedly used exclusively for conducting these activities). Special storage, warehousing, and security systems installed in her home are claimed as being necessary to protect her valuable, potentially income-producing material.
The petition also states that the clothing Ms. Nicks is required to wear for her performances as a musical artist is specially designed or specially purchased and neither suitable for ordinary wear nor adaptable to her general or continued usage. Much of Ms. Nicks's clothing is discarded immediately after use "because it simply cannot be reused, given the energy levels of her performances and the heat generated on stage from lights and physical exertion."
The petition further explains that Ms. Nicks's performances require her to maintain a stage persona and appearance unlike her everyday persona and appearance, and part of these efforts require appropriate make-up and maintenance of her hairstyles. The $12,495 expenditure for make-up and hairstyling costs do not relate to her "minimal" styling needs when she is not performing.
**3 Ms. Nicks's petition also recites the need for periodic hiring of private security services, both for her home and to accompany her while traveling on business. Because Ms. Nicks allegedly attracts much unwanted attention as a public figure that disturbs and interrupts her trade, both while working from her home and while traveling on business, these expenses are claimed to be ordinary and necessary business expenses.
The largest single item disallowed, namely the $119,291 paid to her personal manager, was challenged by the IRS on the grounds that the expense was "personal." The petition responds that her personal manager (not to be confused with her business manager) assists her trade by lending advice, support, and criticism, negotiating, planning, and otherwise being available as needed to develop and promote her career. She claims these payments, allegedly substantiated by supporting documentation provided on audit, are compensation for services that are ordinary and necessary business expenses.
The Service's disallowance of the personal manager expenses allegedly is contrary to the IRS Market Segment Specialization Program (MSSP) on the Music Industry and on Form 1040 issues in the Entertainment Industry, which recognized such payments as being business expenses if substantiated by, e.g., written contracts and invoices. Accordingly, Ms. Nicks has petitioned the Tax Court to award her reasonable litigation and administrative costs, arguing that the Service's position on this item allegedly is not substantially justified and the deduction represents approximately 40% of the adjustments made by the IRS.
Shop Talk has contacted Ms. Nicks's counsel, George G. Short, Esq., of Los Angeles, who informed us that because Ms. Nicks's representative on audit had refused to extend the statute of limitations, the Service's 90-day letter followed, and shortly after the petition was filed the case was sent back to Appeals for settlement discussions. Mr. Short anticipates a very favorable disposition overall. Shop Talk intends to keep our readers apprised of the outcome.
87 J. Tax'n 63, 1997 WL 726053 (W.G.&.L.)
END OF DOCUMENT