Slaughter v. Comm'r of IRS
| Decision Date | 03 August 2021 |
| Docket Number | 20-10786 |
| Parties | K. SLAUGHTER, Petitioner-Appellant, v. COMMISSIONER OF IRS, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
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Petition for Review of a Decision of the United States Tax Court Agency No. 13256-14.
Before JORDAN, BRASHER, and JULIE CARNES, Circuit Judges.
Karin Slaughter appeals the tax court's decision that she owes almost $190, 000 in self-employment taxes for 2010 and 2011. She argues that the tax court erred in determining that (1) her trade or business included promotional activities in 2010 and 2011 and (2) all of her publishing income during those years was derived from her trade or business. Slaughter's arguments are without merit. Accordingly, we affirm the tax court's decision.
Slaughter is a bestselling crime fiction author who lives in Georgia. During the years relevant to this appeal, Slaughter received income for her books through contracts with publishers. Her contractual obligations varied with the publisher. For English-language publishers, Slaughter was required to write an original manuscript for a book. If the manuscript was delivered to and accepted by the publisher, she received a fixed advance payment in installments specified in her contract. Slaughter also received royalties or subsidiary rights income from those sales if they exceeded her advance. For foreign-language publishers, Slaughter also received similar advances in exchange for the right to print, publish and sell a foreign-language translation of one of her existing books.
Since signing her first publishing contract in 1999, Slaughter has retained the same literary agent to help promote her work with publishers, booksellers, and book reviewers. Slaughter and her agent promote her brand in several ways: maintaining contact with her readership through her website, newsletter, and social media presence; giving interviews; attending promotional and publicity events; giving gifts to business associates and inviting publishers to stay with her in her home; renting an apartment in New York City to attend trade shows and meet publishers there; and paying for a promotional bus poster. Significantly, Slaughter claimed business-expense deductions for all of those activities on her income tax returns for 2010 and 2011.
In 2010, Slaughter received $5, 425, 652 from her publishing contracts after deducting her agent's fees and expenses. But on her income tax return for that year, she reported only $875, 000 as gross business income. After deductions, she calculated a self-employment tax of $18, 725 on that income and reported the remaining $4, 550, 653 as supplemental income. She did not report self-employment tax on the supplemental income.
In 2011, she received $3, 623, 039 from her publishing contracts after deduction of her agent's fees and expenses. But on her income tax return for that year, she reported only $930, 000 as gross business income. After deductions, she calculated a self-employment tax of $17, 882 on that income and reported the remaining $2, 693, 039 as supplemental income. She again did not report self-employment tax on the supplemental income.
In allocating Slaughter's publishing income for both returns, her accountants began with the fact that she took 12 to 15 weeks to write a book and wrote approximately one book per year. For her 2010 return, they assumed that Slaughter worked five days a week for 12 weeks, meaning that she worked 60 days that year.
And because 60 days is about 16.43% of a 365-day year, they reported that percentage of Slaughter's publishing income as her gross business income. For her 2011 return, they used the same method but calculated a higher percentage of publishing income to report as her gross business income because Slaughter had spent more time writing that year.
The IRS concluded that for both returns, Slaughter should have reported all of her publishing income as gross business income instead of just the percentage based on how long she engaged in the physical labor of writing. It issued a notice of deficiency to Slaughter and increased her self-employment taxes accordingly.
Slaughter then filed a petition in the United States Tax Court for redetermination of the deficiencies asserted in the notice, and a trial was scheduled. In her pre-trial memorandum, Slaughter argued that only part of her income for her "writing services" should be subject to self-employment tax. The IRS argued in its pre-trial memorandum that Slaughter's entire income from her publishing contracts was subject to self-employment tax because it was derived from her trade or business. It further argued that payments to Slaughter for various intangible assets were subject to self-employment tax because those rights were a part of her trade or business.
At trial, both parties reiterated and clarified their respective arguments in their opening statements. Slaughter specifically insisted that her only trade or business was writing. The IRS agreed that Slaughter was in the trade or business of writing, but it rejected Slaughter's argument that her "writing" business consisted only of the physical labor of writing and that her marketing and licensing fell outside that trade or business.
After the trial and submission of post-trial briefing, the tax court held that all of Slaughter'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. Slaughter filed a motion for reconsideration in which she argued that the IRS had "stipulated" at trial and in its briefs that her only business was "writing." The tax court denied her motion and entered a decision stating that Slaughter owed almost $190, 000 in self-employment tax. Slaughter timely appealed.
"We review decisions of the Tax Court in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." Long v. Comm'r, 772 F.3d 670, 675 (11th Cir. 2014) (internal quotation marks omitted) (quoting 26 U.S.C. § 7482(a)(1)). Accordingly, we review the tax court's legal conclusions de novo and its findings of fact for clear error. See Palmer Ranch Holdings Ltd v. Comm'r, 812 F.3d 982, 993 (11th Cir. 2016). "The application of the law to the facts, however, is subject to de novo review." Pope v. Hightower, 101 F.3d 1382, 1383 (11th Cir. 1996). Finally, the tax court's denial of a motion for reconsideration is reviewed for abuse of discretion. Cf. Corwin v. Walt Disney Co., 475 F.3d 1239, 1254 (11th Cir. 2007) ().
Under 26 U.S.C. § 1401, a tax "shall be imposed for each taxable year, on the self-employment income of every individual[.]" Generally speaking, "[t]he term 'self-employment income' means the net earnings from self-employment derived by an individual," and "[t]he term 'net earnings from self-employment' means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions . . . attributable to such trade or business[.]" 26 U.S.C. § 1402(a), (b). "The self-employment tax provisions are broadly construed to favor treatment of income as earnings from self-employment." Peterson v. Comm'r, 827 F.3d 968, 986 (11th Cir. 2016).
On appeal, Slaughter argues that most of her publishing income is not subject to the self-employment tax described above. Before turning to her arguments for that conclusion, we first address a preliminary issue. Slaughter argues that the IRS stipulated in the tax court proceedings that she was in the trade or business of writing only. She then argues that the IRS dispositively conceded that her trade or business included only the physical labor of writing and not any promotional activities. She further argues that the tax court erred in rejecting the IRS's stipulation in its denial of her motion for reconsideration. If Slaughter were correct, then she would prevail because any income that was not from her physical labor of writing would not be subject to self-employment tax.
But she is not correct for the following two reasons.
First, the IRS always made clear that although it agreed that Slaughter's business was writing, it disagreed with her about what that writing business entailed. For example, immediately after agreeing with Slaughter's proposed finding that "she was not in any business other than writing," the IRS objected in detail to her next proposed finding, that she was "not in the business of selling books." Even if the IRS's agreement with the first proposed finding were a stipulation, that stipulation must be read in light of the IRS's objection to the second proposed finding. Gomez v. Rivera Rodriguez, 344 F.3d 103, 121 (1st Cir. 2003) ( .
Second Slaughter's view of the record would make the litigation below unintelligible. A major issue argued before the tax court was whether Slaughter's trade or business included promotional activities in 2010 and 2011. And the IRS argued repeatedly and consistently that it did. But if-as Slaughter contends-the IRS later conceded that her trade or business did not include promotional...
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