Guest Commentary: Tax Court Decision Good News For Musicians

Rock'n'roll image aside, even musicians have to deal with that most unglamorous of topics: taxes. And a recent court ruling offers some potentially good news on this subject that is worth taking note of.
In a recent federal Tax Court case, Valerie Jean Geneck vs. Commissioner, a self-employed musician was allowed to deduct a home office/studio in spite of the very difficult standards of an earlier Supreme Court ruling. This new ruling, issued in March, has broad implications for many home-based musicians, sound engineers, band managers, and others, possibly permitting them to deduct home offices and related expenses in 1998 and earlier years.
The musician was a lead singer in a jazz band with her bass-guitarist husband, and she also managed the band in Hollywood, Fla. She spent an average of 12 hours per week performing and 30 hours per week in the home office. Their apartment is divided into living quarters and an office, which consists of a large studio containing recording equipment, computers, filing cabinets, etc. There also was a smaller room with a desk, phone, couch, and kitchenette.
The musician/manager designed fliers promoting the band in the office; booked band performances; negotiated contracts; filed lyrics, music books, and audio/video demos; and hired other musicians. She also coordinated stage apparel and issued paychecks from this office.
The Tax Court held that, first, the office/studio must be used exclusively on a regular basis as the principal place of business. The court was convinced by her well-organized testimony and evidence that the office was used exclusively and on a regular basis. However, the court had to address the 1993 U.S. Supreme Court holding in Commissioner vs. Soliman on the "principal place of business" requirement.
The issue in question was whether a band's "principal place of business" is the location where they perform, since this is where they earn the money, or their office‹or can it be considered both places? The Supreme Court case required two primary considerations to determine the "principal place of business": (1) the relative importance of the activities performed at each location and (2) the time spent at each location.
In Soliman, the Supreme Court denied a home office deduction to a self-employed anesthesiologist since he performed only administrative functions, including billing patients, at home;
but his professional services were
performed at a hospital.
In the recent case, the Tax Court held: (a) that the importance of the home office activities supports the deduction and (b) that the 30 hours per week of office services met the time standard as well. Obviously, this was a very active band, and the band manager was so well organized and documented her case so well that the Tax Court found her testimony highly credible‹surmounting even the Supreme Court case obstacle.
Home-based musicians, managers, sound engineers, and others should consider whether their own home offices/studios are sufficiently similar to this case to permit a tax deduction. If so, amended returns claiming the deduction can still be filed for 1995, 1996, and 1997 to obtain tax refunds. Also, the home office deduction may be claimed under this case in 1998.
Some notes of caution:
1. The Tax Court implied that the home office deduction was allowed solely for a musician's role as band manager; her role as lead singer would not by itself have entitled her to a deduction. However, many musicians do many more business activities than simply perform.
2. This was a Tax Court memorandum decision, which has less precedential authority than a regular, full Tax Court decision.
3. The government has until June 16 to appeal this case.
For 1999 and later years, the home office deduction was considerably liberalized by Congress, and the Soliman case was legislated out in the Taxpayer Relief Act of 1997. Accordingly, even if someone performs substantial services away from a home office (performing, auditioning, etc.), he or she may still be entitled to a home office deduction. The home office may be used simply for management of administrative matters if no other fixed location exists, so long as it is used on a regular and exclusive basis.
Beginning in 1999, the new rules will restore the home office deduction to many small-business owners who perform significant business functions outside their home offices.