Karin Slaughter’s recently released latest novel False Witness focuses on a lawyer in a prestigious Atlanta firm gearing up for a criminal trial. Coincidentally we have this week the outcome of her own legal drama, which likely only excites the tax blogosphere. Her appeal to the Eleventh Circuit of a 2019 Tax Court decision confirming that she owed almost $190,000 in self-employment tax for 2010 and 2011 was unsuccessful.
Crime Writer
Karin Slaughter is a very successful writer of crime thrillers. Between her Grant County series and Will Trent series and some stand alone works she has twenty one novels, starting with Blindsighted in 2001. According to her website people have bought over 35 million copies of her books which have been published in 120 countries.
Ms. Slaughter appears to be very discreet. There is not much about her personal life in the public record. It is reasonable to infer from the tax litigation that her income is quite substantial. She excluded a portion of her income from writing and promoting her work as attributable to her brand and therefore not subject to self-employment tax. In 2010 she excluded over $4.5 million from self-employment income and $2.7 million in 2011.
The Theory
The theory that is used to create the exclusion from SE tax is spelled out in the Tax Court decision.
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.
In other contexts, the IRS has supported this position. When author VC Andrews passed away, her series of children in jeopardy novels was continued under the VC Andrews name with another writer doing the work. The IRS insisted that her name had value that should be included in her estate. Judge Robert Payne of the US District Court for the Eastern District of Virginia agreed. It is worth noting that VC Andrews is one of the authors that Karin Slaughter mentions when she praises the librarians who gave her great books to read.
In order for the argument to work there is another step. And that would be that working on the brand was not itself a trade or business. Slaughter argued that the IRS had conceded that her only business was writing. This all went nowhere. Most significantly she deducted expenses that were promotional in nature such as the rent on her New York apartment, car expenses for interviews and promotional events and advertising an website expenses.
An interesting exercise would have been to reclassify those expenses as miscellaneous itemized deductions and see how the AMT ate into the SE savings. And of course nowadays that would cause them to be disallowed entirely.
Ultimately, the Appellate Court agreed with the Tax Court that all the income is related to her business as a writer.
How It Might Have Worked
If Ms. Slaughter had run her business through an S corporation and the corporation paid her a reasonable salary, she would have avoided SE tax on the remainder. People who carry this technique too far get in trouble with the IRS, but it is somewhat hampered because there are other circumstances where it will challenge salaries for being too high. Regardless of how the numbers would have exactly broken, it would not have been an all or nothing proposition. This is an example of Reilly’s Eighth Law of Tax Planning – Both before and after thinking outside the box, take a look inside the box. The S corporation is a pretty plain vanilla technique, while Slaughter’s arguments were pretty esoteric.
Other Coverage
Ed Zollars has Eleventh Circuit Affirms Tax Court Ruling That Author Had to Treat All of Her Publishing Contract Income as Self-Employment Income.
I covered the original Tax Court decision with S Corporation Might Have Been Better Plan For Writer Karin Slaughter.
Lew Taishoff covered the Tax Court decision with The Brand. His comment to me on the out of the appeal was “No surprise”.
Janet Novack covered the case at an earlier stage with - Tax Thriller: Best Selling Crime Writer Karin Slaughter Versus The IRS.
Unrelated Note
I started False Witness and am finding it pretty compelling. My partner and I have both appreciated Slaughter’s work although finding it a bit on the gruesome side for our tastes.