                               T.C. Memo. 2019-65



                        UNITED STATES TAX COURT



                    K. SLAUGHTER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13256-14.                         Filed June 4, 2019.



      Charles E. Hodges II, Lynn E. Fowler, and James E. Brown, for petitioner.

      David Delduco, John W. Sheffield III, Courtney S. Bacon, Christopher D.

Bradley, and Shannon E. Craft, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      WELLS, Judge: The instant case involves determinations of deficiencies in

self-employment taxes pursuant to section 1401(a) of $155,931 and $110,670, and

section 6662(a) penalties of $31,186 and $22,134, for petitioner’s tax years 2010

and 2011, respectively. Petitioner is a successful author who during the years in
                                           -2-

[*2] issue received substantial royalty income pursuant to several publishing

contracts. Respondent contends that all of the payments petitioner received from

her publishing contracts during 2010 and 2011 were derived from her trade or

business as an author and, therefore, are subject to self-employment tax pursuant

to section 1401(a).1 Petitioner contends that only a portion of the payments is

allocable to her trade or business, which she defines narrowly to include only her

writing.

      The central issue we must decide is how much of petitioner’s income from

publishing contracts is derived from her trade or business and, therefore, subject to

self-employment tax.2 If we conclude that petitioner understated the amount of

her trade or business income and that there are deficiencies, we must then also

decide whether the section 6662(a) and (b)(1) negligence penalty applies.

                                 FINDINGS OF FACT

      Petitioner resided in Georgia when the petition was filed. During taxable

years 2010 and 2011, petitioner spent roughly 12 to 15 weeks in Georgia engaged

in writing. Petitioner has worked since the 1990s to establish herself as a brand


      1
        All section references are to the Internal Revenue Code in effect for the
years in issue, and all Rules references are to the Tax Court Rules of Practice and
Procedure, unless otherwise indicated.
      2
          The parties settled all other matters in the notice of deficiency.
                                         -3-

[*3] author because it was her determination that the difference between writing

generally and writing for a living is branding. A brand author is one who provides

prestige or reliable profits to a publishing house. When she decided to become a

writer, petitioner set out in a businesslike fashion to obtain stationery, a reputable

agent, and a contract with a New York publishing house. She succeeded in

working with a media coach and publishers to develop her name and likeness into

a successful brand. Therefore, in addition to writing, she spent time during 2010

and 2011 meeting with publishers, agents, media contacts, and others to protect

and further her status as a brand author.

      During the years in issue, petitioner received payments pursuant to contracts

she had entered into during the years 1999 through 2011 (contracts). The

contracts all provide for payments in a similar manner. The publishers agree to

make two types of payments. The first is a nonrefundable advance, paid in the

respective ways set forth in the contracts. The second is a royalty, or a portion of

the revenue or profits generated by the sales of petitioner’s manuscripts.3 The

      3
        A third type of payment, which the parties did not address in detail, is
bonuses tied to the sale numbers of the contracted-for books and adaptations of
petitioner’s books into movies. Petitioner entered into separate contracts for the
manufacture and sale of audio versions of her books. Those contracts follow a
pattern similar to the book contracts, in which the publisher agrees to pay
petitioner royalties from the sales, rentals, downloads, and sublicensing of the
                                                                        (continued...)
                                         -4-

[*4] contracts specify the royalty rates applied to the revenue or profits from the

works; only the amounts in excess of the advance amounts are paid as royalties.

      The contracting publishers receive more than just the right to print, publish,

distribute, sell, and license the works and manuscripts written, or to be written, by

petitioner. They also secure the right to use her name and likeness in advertising,

promotion, and publicity for the contracted works. Petitioner is required to

provide photos and be available for promotional activities. The contracts include

noncompete clauses which vary in scope, from requiring that the specified

manuscript be completed before others, to prohibiting petitioner’s entry into

another contract until her writing obligations are met. Publishers also secure the

right to advertise other works in petitioner’s books, qualified by the requirement

that petitioner consent to the specific advertisements. Several of the contracts

allow for, but do not require, a share of advertising proceeds to be paid to

petitioner as a condition of her consent. Finally, the contracts include an exclusive

option for the respective publisher to negotiate the contract for petitioner’s next

works.




      3
       (...continued)
audio versions of her books.
                                         -5-

[*5] Petitioner also receives more than just her advances and royalties. For

instance, some contracts include a marketing guaranty requiring the publisher to

spend a minimum amount on marketing for petitioner’s books. Although the

publishers fund the marketing plan, petitioner’s agent retains the authority over its

development. Another example is petitioner’s option to purchase the publisher’s

plates at a reduced cost for any book that goes out of print and that the publisher

refuses to reissue or license. In that instance, the rights in the work also revert to

petitioner.

      The various requirements of the contracts and the additional benefits

described above appear to be standard in the publishing industry. It is not

standard, however, to assign a particular value to such rights and benefits in the

contracts. Petitioner’s contracts are no exception; they do not allocate the

advances or royalties between writing the works, promoting the works,

noncompete clauses, or exclusive options.

      On her Federal income tax returns for 2010 and 2011 petitioner deducted as

a business expense the cost of leasing a vehicle to attend media interviews and

promotional events. She also deducted the cost of hosting her own promotional

events. Not all of petitioner’s meetings and events were within driving distance of

Atlanta, however. For marketing purposes, many of her meetings were scheduled
                                         -6-

[*6] in New York City. While there, petitioner often attended meetings,

conducted media interviews, and participated in publishing industry events such as

trade shows. During the years in issue petitioner also met with a fellow writer to

collaborate on a script for a possible television series. To facilitate her various

activities, petitioner rented an apartment in New York City and deducted the rent

on her 2010 and 2011 returns (NYC apartment). Petitioner also deducted the cost

of business gifts to agents, editors, publishers, and others.

      Petitioner’s promotional activities and writing have created a very

successful brand and body of work. In petitioner’s case, her brand includes her

name and likeness as well as her reputation, goodwill, and existing readership.

Book buyers walk into book stores and request petitioner’s books using her name

rather than the title. Petitioner has developed good relationships with booksellers

and librarians, which help to sell her books. She also maintains contact with her

readership through social media, websites, and a newsletter.

      Petitioner was not a brand author when she signed her first contract in 1999.

By the time she entered into her contract in 2007, she had become a brand author

and her typical advance had grown eightfold. Today, petitioner spends the same

amount of time writing a book as she did in 1999. The change in income is due to

petitioner’s cachet as a brand author, i.e., her ability to attract and engage readers,
                                         -7-

[*7] speak in front of a crowd, and recommend other authors within her publishing

house. Petitioner’s name is valuable to her publisher because it is how book

buyers identify her books. Because petitioner sells books and is able to entice

people into book stores, she fits into her publishers’ business “like a jewel in

the[ir] crown.” In short, publishers now pay more for petitioner’s work because of

her brand.

      To prepare her 2010 and 2011 returns, petitioner turned to the same tax

preparation firm she has worked with for approximately 20 years. Several people

from the firm, including Karen Wesley, a certified public accountant, worked

together to prepare petitioner’s 2010 and 2011 returns. Ms. Wesley has been

licensed since 1989, prepares roughly 300 tax returns per year, and has worked

with petitioner for approximately eight years. In order to prepare the returns,

petitioner first met with a bookkeeper and then with Ms. Wesley to review

questions and ensure that the firm had everything it needed. For each return, the

firm worked as a team and addressed any followup issues with petitioner on the

phone. After finalizing the return, petitioner reviewed it with Steve Harless, the

paid preparer who signed the return.

      Over the course of working with petitioner and talking with petitioner’s

agent, it became apparent to Ms. Wesley that petitioner was compensated for more
                                         -8-

[*8] than simply writing. Ms. Wesley came to understand that an author’s earned

income is generally the amount paid for actually writing but that petitioner’s

income was higher because she was also paid for her name and likeness. Ms.

Wesley concluded that any amount paid to petitioner for the use of her name and

likeness was “investment income”, i.e., payment for an intangible asset beyond

that of her trade or business as an author. Ms. Wesley noted the distinction

between investment income and income generated from writing because, in her

opinion, only the latter would give rise to self-employment tax. Ms. Wesley

therefore concluded that petitioner should pay self-employment tax only on the

amount that publishers pay her for writing and not on amounts paid for her name

and likeness.

      Although the preparers conducted research to determine the income

allocable to petitioner’s trade or business, they found no definitive authority in the

particular instance of a brand author’s income. They decided to report all of the

advances and royalties petitioner received on a Schedule E, Supplemental Income

and Loss, subtract the portion relating to the trade or business of writing, and

report that amount on a Schedule C, Profit or Loss From Business. The Schedule

C amount, therefore, represents the team’s calculation of petitioner’s trade or

business income. The preparers calculated the amount of petitioner’s self-
                                        -9-

[*9] employment tax due using only the Schedule C income amount; they did not

calculate any self-employment tax due from the balance of the advances and

royalties left on Schedule E.

      The accounting team did not have copies of petitioner’s publishing

contracts. To calculate the amount reported on petitioner’s Schedule C, the

preparers used a calendar-based approach. They applied the percentage of the year

which petitioner spent writing to the total payments she received for the year.

Petitioner did not provide the preparers with a work calendar. Instead, the

preparers relied on petitioner’s statement that it took her roughly 12 to 15 weeks to

produce a manuscript for a publisher. The preparers applied a 12-week period and

assumed a five-day workweek because petitioner told them she occasionally took

time off from writing. For the 2011 tax year the percentage reported was higher

than that for 2010 because petitioner spent more time writing.

      No other adviser recommended apportioning the income in the foregoing

manner, and no appraiser was employed to value petitioner’s contracts or opine on

the calendar-based approach. The only individuals outside the accounting firm

with whom the team discussed their conclusions were petitioner and her agent.

The preparers shared with petitioner the plan to split the income; explained that it

was based on a conclusion that some of petitioner’s income from the publishing
                                        - 10 -

[*10] contracts was not related to her trade or business of writing; and discussed

their computations, which were based on the percentage of petitioner’s time spent

writing. Petitioner was a longtime client of the accounting firm, and she relied on

their conclusions and judgment to prepare accurate returns. The preparers told

petitioner that they did not find authority for treating the income in the manner

they suggested but advised her that the allocation on the returns was proper. The

firm’s preparers did not provide any written advice to petitioner as to the treatment

of her income on the returns. They did not believe such treatment was an

aggressive return position; they considered it reasonable.

                                     OPINION

      We must decide what portion of petitioner’s income from publishing

contracts is derived from her trade or business and, therefore, subject to self-

employment tax pursuant to section 1401(a). We have jurisdiction over

petitioner’s timely filed petition. See secs. 6211(a), 6213(a); Philbin v.

Commissioner, 26 T.C. 1159 (1956); sec. 1.1401-1(a), Income Tax Regs. We

decide this case on the preponderance of the evidence. See Knudsen v.

Commissioner, 131 T.C. 185, 189 (2008), supplementing T.C. Memo 2007-340.

      Section 1401(a) imposes a tax on the self-employment income of every

individual. Section 1402(b) defines “self-employment income” as “net earnings
                                       - 11 -

[*11] from self-employment”. Section 1402(a) defines “net earnings from self-

employment” in pertinent part as “the gross income derived by an individual from

any trade or business carried on by such individual, less the deductions allowed by

this subtitle which are attributable to such trade or business”. The term “derived”,

in turn, requires “a nexus between the income received and a trade or business that

is, or was, actually carried on. * * * [T]here [must] be some trade or business

activity by the taxpayer which gives rise to the income”. Newberry v.

Commissioner, 76 T.C. 441, 444 (1981).

      The definition of trade or business must be construed broadly and requires

an examination of all the facts and circumstances. Commissioner v. Groetzinger,

480 U.S. 23, 31 (1987); Hornaday v. Commissioner, 81 T.C. 830, 834, 836-837

(1983). Generally, when used in reference to self-employment income, the term

“trade or business” has the same meaning as it does in section 162. Sec. 1402(c).

To be engaged in a trade or business within the meaning of section 162, and by

extension section 1402, an individual must be involved in an activity with

continuity and regularity, and the primary purpose for engaging in the activity

must be for income and profit. See Commissioner v. Groetzinger, 480 U.S. at 35.

      In summary, for income to be subject to self-employment tax, a taxpayer

must be engaged in a trade or business and the income must derive from that trade
                                        - 12 -

[*12] or business. See secs. 1401(a), 1402(a) and (b). The dispute we must

resolve in this case is whether there is a distinction, for self-employment tax

purposes, between petitioner’s royalty income derived from her writing and any

royalty income derived from her name and likeness. Petitioner contends that one

portion of her royalty payments is derived from her writing, which is a trade or

business, and that another portion is derived, not from her writing, but rather

solely from her name and likeness--personal attributes which are not part of any

trade or business.

      Respondent contends that there is a sufficient nexus between the royalties

paid to petitioner and her trade or business of writing such that all of her income

from publishing contracts is subject to self-employment tax. Respondent relies

upon several cases in which we concluded that the taxpayers, who were authors,

owed self-employment tax on all of their royalty income. See Dacey v.

Commissioner, T.C. Memo. 1992-187; Hittleman v. Commissioner, T.C. Memo.

1990-325, aff’d, 945 F.2d 409 (9th Cir. 1991); Allen v. Commissioner, T.C.

Memo. 1982-93, aff’d, 707 F.2d 522 (11th Cir. 1983); see also Rev. Rul. 68-498,

1968-2 C.B. 377; Rev. Rul. 55-385, 1955-1 C.B. 100. None of the taxpayer-

authors in the foregoing cases and revenue rulings cited by respondent, however,

contended that the royalty payments should be allocated between the trade or
                                         - 13 -

[*13] business of writing and an intangible asset. Petitioner is not challenging her

deficiency on the basis of allowable expenses, see Allen v. Commissioner, T.C.

Memo. 1982-93, attempting to shift her royalty income by donating her copyrights

to a nonprofit entity of her own creation, see Hittleman v. Commissioner, T.C.

Memo. 1990-325, or contending that her writing activity is a hobby, see Dacey v.

Commissioner, T.C. Memo. 1992-187; Rev. Rul. 68-498, supra.4 None of the

authorities cited by respondent establishes that income derived from an author’s

brand provides a sufficient nexus to her trade or business of writing so as to be

subject to self-employment tax.

      Respondent contends that this Court and others have limited the application

of the nexus test, both explicitly and implicitly, to cases with a particular set of

distinguishable facts: when taxpayers receive payments in lieu of engaging in

their trade or business, meaning that the payments are separate and distinct from

the taxpayer’s trade or business and that they are made precisely for not engaging


      4
        We are not bound by revenue rulings, and we evaluate them on the basis of
the “power to persuade” standard articulated by the Supreme Court in Skidmore v.
Swift & Co., 323 U.S. 134, 139 (1944). See Taproot Admin. Servs., Inc. v.
Commissioner, 133 T.C. 202, 208-209 (2009), aff’d, 679 F.3d 1109 (9th Cir.
2012); PSB Holdings, Inc. v. Commissioner, 129 T.C. 131, 142 (2007). Under
that standard, the weight we give revenue rulings “depends upon their
persuasiveness and the consistency of the Commissioner’s position over time.”
Taproot Admin. Servs., Inc. v. Commissioner, 133 T.C. at 209.
                                       - 14 -

[*14] in it. See, e.g., Peterson v. Commissioner, 827 F.3d 968 (11th Cir. 2016)

(addressing whether postretirement program distributions are subject to self-

employment tax), aff’g in part, dismissing in part T.C. Memo. 2013-271; Gump v.

United States, 86 F.3d 1126 (Fed. Cir. 1996) (analyzing termination payments);

Milligan v. Commissioner, 38 F.3d 1094, 1099-1100 (9th Cir. 1994) (“[The

taxpayer] received these payments precisely because he was no longer working for

State Farm.”), rev’g T.C. Memo. 1992-655; Jackson v. Commissioner, 108 T.C.

130 (1997) (analyzing termination payments); Newberry v. Commissioner, 76 T.C.

441 (finding that the insurance payments in issue were made explicitly for the

taxpayer’s inability to work).

      Petitioner contends that the payments for her brand are, contrary to

respondent’s contention, separate and distinct from payments for her trade or

business of writing. She furthermore contends that this is the case even when they

are made by one payor and that these distinct payments are not trade or business

income. Petitioner cites Rev. Rul. 68-499, 1968-2 C.B. 421, in support of both of

her contentions. Rev. Rul. 68-499, supra, discusses a company paying royalties to

certain individuals who are also employed by the company. On the basis that the

licensing contracts are separate and distinct from the employment contracts, the

revenue ruling concludes that the royalties are not paid for services performed by
                                         - 15 -

[*15] the individuals, that they are not “wages”, and that therefore they are not

subject to payroll taxes. Id.

      Petitioner offered expert testimony in support of her contention that, just as

with the employer in Rev. Rul. 68-499, supra, her publishers’ intent was to pay

one amount for her writing and another separate and distinct amount for her

brand.5 According to petitioner’s expert, the actual writing of a manuscript is but

a small percentage of the value a publisher seeks from an author. An author’s

work may sell on the basis of the author’s name and readers’ expectations for a

particular kind of story, rather than for the quality of the writing. The total

contract amount is greatly influenced by several elements, such as branding, which

are not spelled out on paper but are known to both parties. Despite the existence

of these other elements, petitioner’s expert testified that she has always seen them

valued together with the writing of the manuscript. On the basis of this testimony,

petitioner contends that the amount paid for her writing is what a publisher would

pay a nonbrand author, and the excess of that amount is a separate and distinct

payment for her brand.




      5
        Petitioner’s expert was not qualified or offered as an expert in valuation
but rather as an expert in the publishing industry and author branding.
                                        - 16 -

[*16] Analogizing earned wages to net earnings, and payroll taxes to self-

employment tax, petitioner contends that the conclusion in Rev. Rul. 68-499,

supra, should be applied to her case. Specifically, she contends that payment for

the writing of a manuscript is payment for a service; wages have been defined as

payments made in exchange for services, sec. 3121(b); Milligan v. Commissioner,

38 F.3d at 1099 n.7, and therefore, by analogy, payment for such a service should

be subject to self-employment tax just as wages are subject to payroll taxes. In

contrast, payment for something other than a service, such as the licensing

royalties, is not a wage, see Jones v. Commissioner, T.C. Memo. 1998-354, so the

separate and distinct payment for petitioner’s brand should not be subject to self-

employment tax.

      Respondent counters that we should disregard the parties’ intent because

petitioner is improperly attempting to add or vary the meaning of the contracts

using inadmissible parol evidence.6 See Estate of Goldberg v. Commissioner, T.C.

      6
        When a taxpayer attempts to challenge a contractual allocation, this Court
generally applies the strong proof rule unless the court to which appeal would
normally lie has adopted a different rule. Golsen v. Commissioner, 54 T.C. 742,
756-757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971). The Court of Appeals for
the Eleventh Circuit, to which the instant case is appealable absent stipulation to
the contrary, has adopted the rule of Commissioner v. Danielson, 378 F.2d 771,
775 (3d Cir. 1967), vacating and remanding 44 T.C. 549 (1965). See Peterson v.
Commissioner, 827 F.3d 968, 988 (11th Cir. 2016), aff’g in part, dismissing in
                                                                        (continued...)
                                        - 17 -

[*17] Memo. 2010-26. Furthermore, he contends that there is no separate and

distinct payment because all of petitioner’s income is directly or indirectly tied to

the selling of her books. If a contract provides no allocation between different

elements, however, then it is ambiguous and we may analyze the mutual intent of

the parties. See, e.g., Jorgl v. Commissioner, T.C. Memo. 2000-10, aff’d without

published opinion, 264 F.3d 1145 (11th Cir. 2001); see also Peterson Mach. Tool,

Inc. v. Commissioner, 79 T.C. 72, 82 (1982), aff’d, 54 A.F.T.R.2d 84-5407 (10th

Cir. 1984). Furthermore, this Court has analyzed single royalty contracts to

allocate different types of compensation for purposes of the income tax. See, e.g.,

Garcia v. Commissioner, 140 T.C. 141 (2013); Goosen v. Commissioner, 136 T.C.

547 (2011); Kramer v. Commissioner, 80 T.C. 768 (1983).

      In this case, however, we need not analyze the contract parties’ intent,

because petitioner’s reliance on Rev. Rul. 68-499, supra, is misplaced.

Petitioner’s analogy fails because it attempts to adapt out-of-context definitions of

employment to the definition of trade or business income under section 1402. We

are not able to focus solely on the words “net earnings” to the exclusion of the

      6
       (...continued)
part T.C. Memo. 2013-271. Taxpayers can challenge the tax consequences of an
agreement only by adducing proof which would be admissible to alter its
construction in an action between the contracting parties, or to show a contract’s
unenforceability because of mistake, undue influence, fraud, duress, et cetera. Id.
                                        - 18 -

[*18] words “trade or business”. The statute provides that “net earnings from self-

employment” includes income derived from any trade or business. An allocation

within petitioner’s contracts is beside the point if all elements are to be allocated

to a trade or business.

      We conclude that petitioner’s brand is part of her trade or business. We

construe “trade or business” broadly, and, examining all of the facts, find that

petitioner was engaged in developing her brand with continuity and regularity for

the primary purpose of income and profit. See Jones v. Commissioner, T.C.

Memo. 1998-354; Dacey v. Commissioner, T.C. Memo. 1992-187; Hittleman v.

Commissioner, T.C. Memo. 1990-325. Petitioner set out in a businesslike fashion

to obtain stationery, a reputable agent, and a publishing contract. Petitioner

worked with a media coach and publishers to develop a successful brand. She has

spent time, including during 2010 and 2011, meeting with publishers, agents,

media contacts, and others to protect and further her status as a brand author. She

attended interviews and promotional events and works to develop and maintain

good relationships with booksellers and librarians. Petitioner also uses social

media, websites, and a newsletter to maintain her brand with her readership.

Further, it is common in the publishing industry for writers to build brands and

promote their work. We have held that an author’s TV and radio appearances, for
                                        - 19 -

[*19] example, are evidence that a taxpayer is in the trade or business of writing

rather than writing as a hobby. See, e.g., Dacey v. Commissioner, T.C. Memo.

1992-187.

      Petitioner contends that her brand could never be part of a trade or business

because she is “not in the trade or business of being herself”. Furthermore, her

brand is not “tied to the quantity or quality” of her writing, and therefore it has an

insufficient nexus with her trade or business as an author. We do not agree. The

fact that petitioner’s brand involves personal traits such as her name and likeness

does not mean that it cannot form part of her trade or business. If petitioner’s

brand has commercial value, it can form part of her trade or business.

      Petitioner also misapplies the nexus test. To satisfy the nexus test, the

earnings must be tied to the quantity or quality of the taxpayer’s labor. Milligan v.

Commissioner, 38 F.3d at 1098. The question is not whether petitioner’s brand is

tied to the quantity or quality of her writing, but rather whether the payments for

her brand are tied to the quantity or quality of her efforts in developing her brand.

Petitioner herself admits she has worked to develop a brand. Royalties earned

from her brand are not solely a result of her publishers’ actions. Although the

publishers fund the marketing plan for petitioner’s books, petitioner’s agent

retains the authority over its development. Petitioner’s and her agent’s
                                         - 20 -

[*20] promotional activities and monitoring of sales information contribute to the

sale of her books. Such sales-focused work is sufficiently routine that we consider

it part of petitioner’s trade or business. Petitioner’s books, in turn, sell in part on

the basis of her brand strength. Petitioner’s brand signals to readers what content

they can expect from her books. The loyalty of her readership base translates into

higher sales, and her high sales then enhance her brand. Petitioner’s brand and her

writing combined are monetized, first, by the selling of books, and second, by

providing petitioner with the leverage to negotiate for higher advances and royalty

rates.

         We note petitioner’s treatment of her expenses as further evidence that

payments for her brand derive from a trade or business.7 Petitioner deducted the

rent paid for the NYC apartment on her Schedule C, even though most of her


         7
        Analyzing petitioner’s business expenses in this manner does not
contradict the parties’ stipulation, is not unfair, and is not a new matter raised by
respondent that shifts the burden of proof. See Rule 142(a). A new position taken
by the Commissioner is not necessarily a new matter if it merely clarifies or
develops the original determination and is consistent with or does not increase the
amount of deficiency. Estate of Jayne v. Commissioner, 61 T.C. 744, 748-749
(1974). The parties stipulated certain amounts petitioner was entitled to deduct as
business expenses; the parties did not stipulate that the expenses related to
petitioner’s writing and not her brand. Respondent’s analysis merely develops the
original determination that all of petitioner’s income from publishing contracts is
trade or business income, whether it was paid for her writing or her brand, and is,
therefore, not a new matter.
                                         - 21 -

[*21] writing was done in Georgia. The apartment’s main purpose was to

facilitate petitioner’s attendance at meetings and conferences and to make

connections with agents, publishers, and booksellers. Petitioner may have met

with a screenwriter in the NYC apartment to collaborate on a script, but the

fundamental benefit of having a presence in New York City was to develop her

brand, not to write. Petitioner also deducted advertising costs, the cost of a car

used, in part, to attend promotional activities around Atlanta, and gifts sent to her

contacts in the publishing world. Such expenses demonstrate that petitioner’s

trade or business extends beyond writing to its promotion. If such promotion and

brand-related expenditures are Schedule C trade or business expenses, then the

income derived from the brand to which those expenses relate is also trade or

business income. See sec. 1402(c).

      We turn finally to the remaining non-trade-or-business elements petitioner

contends can be found in her contracts. Such elements include payments for the

publisher’s right to advertise in books published from petitioner’s writing; access

to her readership; the right to continue an existing series; the right to use

characters from prior books published from her writing; and noncompete clauses.

Some of the elements she identified fall squarely within her trade or business. The

elements involving written series and characters are directly related to her writing
                                         - 22 -

[*22] activities. See Newberry v. Commissioner, 76 T.C. at 444. Petitioner’s

readership is made up of those who enjoy petitioner’s writing, therefore providing

a sufficient nexus. Without her writing there can be no books whose pages may be

used for advertising. Further, the contracts include provisions that petitioner is,

upon request, entitled to proceeds from the advertising in her books. If the

contracts provide for additional and separate payment for that revenue, it follows

that none of petitioner’s advances or royalties are allocable to it.

      The remaining element petitioner explicitly identified is the amount paid for

the noncompete clauses in the contracts. Income earned for not working is not

subject to self-employment tax. See, e.g., Milligan v. Commissioner, 38 F.3d

1094; Newberry v. Commissioner, 76 T.C. at 443. Petitioner contends that any

amount allocable to noncompete clauses should similarly not be subject to self-

employment tax. Upon review of petitioner’s so-called noncompete clauses,

however, we conclude that for the most part they do not prevent petitioner from

contracting with others; they merely require that the contracted work be completed
                                       - 23 -

[*23] first.8 Consequently, we hold that petitioner may not exclude any amount

from her trade or business income that she alleges is from noncompete clauses.

      In sum, we conclude that all of the payments to petitioner pursuant to the

publishing contracts are income derived from her trade or business as an author,

and such income is subject to self-employment tax.

      Regarding the penalties, a taxpayer may be liable for a penalty of 20% of

the portion of an underpayment which is attributable to, among other things,

negligence or disregard of rules or regulations. Sec. 6662(a) and (b)(1). The term

“negligence” includes any failure to make a reasonable attempt to comply with the

provisions of internal revenue laws or to exercise the due care that a reasonable

and ordinarily prudent person would exercise under the circumstances. Sec.

6662(c); Neely v. Commissioner, 85 T.C. 934, 947 (1985). It also includes the

failure to make a reasonable attempt to determine the correctness of a position that

would seem to a reasonable person to be “too good to be true.” Sec.

1.6662-3(b)(1)(ii), Income Tax Regs.


      8
        Petitioner also has provided no way to value the payments made for these
clauses. The contracts are silent as to any allocation or cost of a breach;
petitioner’s expert witness testified almost exclusively as to the premium paid for
a brand author and not as to any other right; and applying the calendar method
used by petitioner’s return preparers would be nonsensical for a noncompete
provision.
                                       - 24 -

[*24] Pursuant to section 7491(c), the Commissioner generally bears the burden

of production for any penalty, but the taxpayer bears the ultimate burden of proof.

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).9 Where the Commissioner

has met his burden of production, a taxpayer may attempt to show reasonable

cause for the underpayment. The penalty will not apply if a taxpayer reasonably

relies in good faith on a return preparer. Sec. 6664(c)(1); sec. 1.6664-4(c)(1),

Income Tax Regs. The preparer must be a competent professional with sufficient

expertise to justify reliance; the taxpayer must provide necessary and accurate

information to the preparer; and the taxpayer must actually rely in good faith on

the preparer’s judgment. Neonatology Assocs., P.A. v. Commissioner, 115 T.C.

43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002). For a taxpayer to reasonably

rely on a preparer’s advice, the advice must not be based on unreasonable factual

or legal assumptions. Sec. 1.6664-4(c)(1)(i) and (ii), Income Tax Regs.

      Petitioner engaged the services of several qualified professionals to prepare

her tax returns, including a certified public accountant with many decades of

experience. Petitioner provided everything requested from her, and the preparers


      9
        Petitioner moved that the Court hold that respondent failed to meet his
burden of production as to the sec. 6662(a) penalty. Because we find that
petitioner had reasonable cause for her underpayment, we will deny the motion as
moot.
                                        - 25 -

[*25] were satisfied with the information. It was reasonable for petitioner to rely

on her preparers’ expertise, considering that she has no background in finance,

law, or tax. See United States v. Boyle, 469 U.S. 241, 251 (1985). The preparers’

advice was based on an assessment of the facts of petitioner’s situation and a

comparison to the available authority. Accordingly, we hold that petitioner

reasonably relied on the advice of her preparers and, therefore, is not liable for the

negligence penalties.

      To reflect the foregoing,


                                                 An appropriate order and decision

                                        will be entered for respondent as to the

                                        deficiencies and for petitioner as to the

                                        section 6662 penalties.
