The Eleventh Circuit Court of Appeals upheld the Tax Court’s decision regarding self-employment income in the case of Slaughter v. Commissioner.[1]  In this case, an author argued that most of the income she received from her publishing contract was for activities other than the time she spent writing books.  She argued that payments for anything other than time spent writing a book was not income from a trade or business for self-employment tax purposes.

The case involves bestselling crime fiction author Karin Slaughter.  The opinion describes her income received from her publishing contracts as follows:

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.[2]

For the two years involved in the case, Ms. Slaughter received income of over $5.4 million and $3.6 million from her publishing work.  On her return, this income was divided between business and non-business income using the following method:

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.[3]

The IRS objected to this division of income, finding that all of the income she received was derived from her trade or business of writing books.  The United States Tax Court agreed with the IRS, treating all income received by Ms. Slaughter on these contracts as self-employment income.  Ms. Slaughter appealed the decision to the Eleventh Circuit Court of Appeals.

Ms. Slaughter argued that her promotional activities should not be treated as part of her trade or business.

Here, Slaughter argues that her trade or business does not include promotional activities because they were only sporadic and occasional rather than continuous and regular. And she further argues that when the tax court found otherwise, it failed to provide specific details about the time, duration, and frequency of her promotional activities or explain why those activities were continuous and regular in 2010 and 2011.[4]

As the opinion notes, Ms. Slaughter is correct that an activity that is sporadic will not rise to the level of a trade or business:

Section 1402(c) defines “[t]he term ‘trade or business,’ when used with reference to self-employment income or net earnings from self-employment” to “have the same meaning as when used in section 162” of the Tax Code, with limited exceptions that are not applicable to this appeal. 26 U.S.C. § 1402(c). The Supreme Court has held that to be engaged in a trade or business under Section 162, “the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer’s primary purpose for engaging in the activity must be for income or profit.” Comm’r v. Groetzinger, 480 U.S. 23, 35 (1987). “A sporadic activity, a hobby, or an amusement diversion does not qualify.” Id.[5]

However, the panel did not agree with her view that this applied to her promotional activities:

First, determining whether an activity is sufficiently continuous and regular to constitute a trade or business “requires an examination of the facts in each case.” Id. at 36 (quoting Higgins v. Comm’r, 312 U.S. 212, 217 (1941)). Consequently, we review the tax court’s findings on that issue for clear error. “A factual finding is clearly erroneous when a review of the entire record leaves us with the definite and firm conviction that a mistake has been committed.” Berenguela-Alvarado v. Castanos, 950 F.3d 1352, 1357 (11th Cir. 2020) (internal quotation marks omitted). Yet whatever doubts might exist about the tax court’s findings here, they rise nowhere near the level of certainty required for clear error.

One key problem the panel pointed out was the fact that Ms. Slaughter claimed deductions related to expenses incurred for her promotional activities—deductions that could only have been allowed as trade or business expenses under IRC §162(a):

For example, Slaughter’s prior business-expense deductions amply support the tax court’s finding. As the IRS noted throughout the proceedings below, those deductions were for (1) the rent for Slaughter’s New York apartment that she used when going to trade shows and meeting with publishers, (2) payments for a car — which was the same model used by her main character Sara Linton — that she drove to interviews and promotional and networking events, (3) catering expenses and gifts for business associates, and (4) expenses for advertising, her website, and “promotions.” Slaughter could not have claimed deductions for those expenses unless they were paid or incurred “in carrying on any trade or business.” 26 U.S.C. § 162(a). That Slaughter deducted these expenses illustrates that the promotion of her written work was part of her writing business. Indeed, the promotion and sale of books is a key factor distinguishing a writing business, which one engages in for income and profit, from a writing hobby.[6]

The Court also found that Ms. Slaughter had conceded that writing was conducted frequently enough to rise to a trade or business even though she spent relatively small amounts of time writing each year, less than she spent on the promotional activities she argued were sporadic:

Second, Slaughter’s insistence that her promotional activities were interrupted and not full time — and therefore too sporadic and occasional to be a part of her trade or business — is inconsistent with her own position. Although Slaughter maintains that her trade or business is limited to the physical labor of writing — the act of putting pen to paper or finger to key — she spent only approximately 16 and 25 percent of 2010 and 2011, respectively, engaged in that labor. By Slaughter’s own definition, her writing — an indisputably core part of her trade or business — would qualify only as “sporadic and occasional.” Both common sense and Slaughter’s own position therefore require that her promotional activities be considered part of her trade or business. Helvering v. Horst, 311 U.S. 112, 118 (1940) (“Common understanding and experience are the touchstones for the interpretation of the revenue laws.”).[7]

Ms. Slaughter also argued that even if promotion was part of her trade or business, the IRS failed to show the entire amount of her publishing income was sufficiently connected with the trade or business to be self-employment income:

Slaughter also argues that the tax court erred in finding that all of her publishing income in 2010 and 2011 was derived from her trade or business. This argument differs from her first argument: the fact that Slaughter’s promotional activities were a part of her trade or business does not automatically mean that all of her publishing income was derived from her trade or business.[8]

The opinion goes on to explain what would be necessary to show that income is related to a trade or business:

We have held that for self-employment income to be derived from a trade or business, “there must be a nexus between the income received and a trade or business that is, or was, actually carried on.” Peterson, 827 F.3d at 986 (cleaned up). Additionally, “the income must arise from some actual (whether present, past, or future) income-producing activity of the taxpayer before such income becomes subject to self-employment taxes.” Id. (cleaned up). Nonetheless, “[t]he self-employment tax provisions are broadly construed to favor treatment of income as earnings from self-employment.” Id. (quoting Bot v. Comm'r, 353 F.3d 595, 599 (8th Cir. 2003)).[9]

Ms. Slaughter argues that income from her intangible assets is not self-employment income, lacking sufficient nexus to the writing business:

Here, Slaughter argues that income from her intangible assets — specifically the rights to her name and likeness, access to her readership, the right to use characters from her previous books, and noncompetition agreements — is not subject to self-employment tax because there is no nexus between that income and her trade or business. In support of this argument, she cites a Ninth Circuit decision stating that the nexus test is satisfied only if the “earnings [are] tied to the quantity or quality of the taxpayer’s prior labor, rather than the mere fact that the taxpayer worked or works for the payor.” Milligan v. Comm’r, 38 F.3d 1094, 1098 (9th Cir. 1994).[10]

The panel first points out that the Eleventh Circuit only has applied Milligan in the specific type of situation that existed in that case—which was not that of being author:

We have declined to apply the Ninth Circuit’s quantity-or-quality test beyond the context of post-termination payments to insurance agents. See Peterson, 827 F.3d at 992–93 (describing Milligan as “nonbinding,” “distinguish[ing] [that] insurance case[ ] on at least four bases,” and concluding that “the after-termination payments of insurance salesmen” in that case were not “comparable” outside its facts).[11]

As well, the opinion goes on to hold that even if the Ninth Circuit’s test was to be applied in this situation, Ms. Slaughter would still not prevail:

And even if the Ninth Circuit’s test did apply here, we think that all of Slaughter’s publishing income — including the portions from her intangible assets — readily satisfies it. If Slaughter ceased to write or promote her books, then her brand and success as an author would be affected. If she were not writing books, publishers would pay less — or even nothing — for her name and likeness, access to her readership, the right to use her characters, and her agreements not to compete.[12]

The panel found that the licensing of her likeness and name was tied directly to her writing of books:

Regarding her name and likeness, she avers that their licensing “can[not] be reasonably described as used predominantly for profit rather than as a personal right.” She then concludes that income from that licensing cannot be derived from her trade or business because trade or business activity must have the primary purpose of profit. Although she is correct that trade or business activity must be primarily profit-motivated, there is no reason to believe that Slaughter — a longtime bestselling author who has earned millions of dollars from her books — licensed her name and likeness for use on books and related materials for any purpose other than increasing her profit. [13]

Similarly, the panel did not find that she could carve out a portion of her contracts related to a non-competition clause from self-employment income given the nature of such clauses in her contracts:

As for her noncompetition agreements, Slaughter avers that income from an agreement not to compete does not derive from a trade or business. But the supporting caselaw that Slaughter cites in fact undermines her assertion. As she correctly notes, the tax court has previously addressed “whether noncompetition under a covenant not to compete constitutes a trade or business[.]” Ohio Farm Fed’n, Inc. v. Comm’r, 106 T.C. 222, 234 (1996). But contrary to her suggestion, the tax court did not categorically exclude such noncompetition from being a trade or business. Instead, it held that the standard continuity-and-regularity test applied and concluded that in the case before it, “a one-time agreement not to engage in certain activities” did not constitute “the kind of continuous and regular activity characteristic of a trade or business.” Id. But Slaughter’s noncompetition agreements were not one-time events — noncompetition clauses appeared in every American contract that she signed. Moreover, the clauses for the most part did not prevent Slaughter from writing for other publishers — they merely required her to complete the contracted books first. Consequently, we cannot say that the tax court erred in determining that Slaughter’s income from her noncompetition agreements was derived from her trade or business.[14]

Thus, the panel sustained the Tax Court’s finding that all her publishing income was self-employment income.

[1] Slaughter v. Commissioner, No. 20-10786, CA 11, August 3, 2021, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/eleventh-circuit-affirms-author-is-liable-for-self-employment-taxes/76zkq (retrieved August 3, 2021)

[2] Slaughter v. Commissioner, No. 20-10786, CA 11, August 3, 2021

[3] Slaughter v. Commissioner, No. 20-10786, CA 11, August 3, 2021

[4] Slaughter v. Commissioner, No. 20-10786, CA 11, August 3, 2021

[5] Slaughter v. Commissioner, No. 20-10786, CA 11, August 3, 2021

[6] Slaughter v. Commissioner, No. 20-10786, CA 11, August 3, 2021

[7] Slaughter v. Commissioner, No. 20-10786, CA 11, August 3, 2021

[8] Slaughter v. Commissioner, No. 20-10786, CA 11, August 3, 2021

[9] Slaughter v. Commissioner, No. 20-10786, CA 11, August 3, 2021

[10] Slaughter v. Commissioner, No. 20-10786, CA 11, August 3, 2021

[11] Slaughter v. Commissioner, No. 20-10786, CA 11, August 3, 2021

[12] Slaughter v. Commissioner, No. 20-10786, CA 11, August 3, 2021

[13] Slaughter v. Commissioner, No. 20-10786, CA 11, August 3, 2021

[14] Slaughter v. Commissioner, No. 20-10786, CA 11, August 3, 2021