Discussion:Definition of "In the Business Of"

How does the IRS define if someone is "in the business of" doing a particular activity. For example, in some of the rulings I've read regarding intellectual property royalties (books, patent, etc.), profit appears to be subject to SE tax on schedule C if the taxpayer is "in the business of" creating whatever asset royalties were being paid on. If not, the profit is listed on schedule E and not subject to SE tax.

Line 21 of the 1040 has similar wording in the instructions. For example, income from rental of personal property goes on line 21 if it is "you engaged in the rental for profit but you are not in the business of renting such property" otherwise it goes on schedule C.

Is there any type of rule for determining whether someone is in business or not?

For what it's worth Sec. 7701(26) which isn't a whole lot of help.

There have been discussions here in the past sort of about this issue which brought up a couple of tax court cases. If I recall correctly, one involved a retired gentleman who did occasional work for his employer and the other involved a stained glass maker.

I'm ashamed to be stumped by something so simple.

I can go to sleep now!

P.S. Here is the thread I mentioned earlier. The good stuff is toward the middle, and as an added bonus you can read the epic flame war that results.

I have two clients who received royalty income every year from works their father produced. One source was from the father's books, the other illustrations. These are classic Sch E royalties because my clients did nothing to earn this income. Then I have a number of clients who receive royalties and payments for rights for books they may have written years ago from being in the business of writing. Schedule C, despite the time lapse.

One of these gentlement co-wrote one of my wife's favorite films, so everytime it appears on cable I suppose we are making him money to pay his fee. Then I also assume he received something from the DVD we bought. I stand corrected: these film payments come on W-2 forms, and though the film came out in 1996, they keep rolling in, but film studios use the same W-2 arrangement they used when he wrote the screenplay.

I doubt if most people here can realize what a bombshell the Batok case was when it came out. It gave substance to the position that occasionally was taken. While not as powerful as the case that codified that a 1099 is not presumbably correct in itself, the decision in some ways was a radical as the Soliman case decided about that time.

He has received 1099s from independent production outfits for several screenplays, but these are rare.

You have a good point about the expenses: we actually had an audit one year on the allocation between Sch C and the 2106 on the fee ICM levies after it receives his paychecks. I did do the allocation. This guy also wrote a book that won the National Book award. It still earns royalties, as do his other novels. Publishers pay on 1099.

In the case of the film I mentioned, client and another person had written the original story. The screenplay credit listed those two plus the director and another person. Film love Rule of thumb: the more writers, the worse the screenplay. That is one reason Clint Eastwood makes great films, IMO. His works are usually written by one person.

btw, ICM notes that its 1099 does not include the wages they receive.

The phrase "trade or business" has been in §162(a) and in that section's predecessors for many years. Indeed, the phrase is common in the Code, for it appears in over 50 sections and 800 subsections and in hundreds of places in proposed and final income tax regulations. The slightly longer phrases, "carrying on a trade or business" and "engaging in a trade or business," themselves are used no less than 60 times in the Code. The concept thus has a well-known and almost constant presence on our tax-law terrain. Despite this, the Code has never contained a definition of the words "trade or business" for general application, and no regulation has been issued expounding its meaning for all purposes. Neither has a broadly applicable authoritative judicial definition emerged. * * *

Of course, not every income-producing and profit-making endeavor constitutes a trade or business. The income tax law, almost from the beginning, has distinguished between a business or trade, on the one hand, and "transactions entered into for profit but not connected with . . . business or trade," on the other. * * * We accept the fact that to be engaged in a trade or business, 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. A sporadic activity, a hobby, or an amusement diversion does not qualify.

We therefore adhere to the general position * * * that resolution of this issue "requires an examination of the facts in each case." * * * This may be thought by some to be a less-than-satisfactory solution, for facts vary. * * * But the difficulty rests in the Code's wide utilization in various contexts of the term "trade or business," in the absence of an all-purpose definition by statute or regulation, and in our concern that an attempt judicially to formulate and impose a test for all situations would be counterproductive, unhelpful, and even somewhat precarious for the overall integrity of the Code.