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Hadley v. Commissioner of Internal Revenue

decided: May 19, 1987.

ARTHUR T. HADLEY AND SUSAN K. BRYANT, APPELLANTS,
v.
COMMISSIONER OF INTERNAL REVENUE, APPELLEE; LLOYD MCKIM GARRISON AND SARAH GARRISON, APPELLANTS, V. COMMISSIONER OF INTERNAL REVENUE, APPELLEE



Appeal from decisions of the United States Tax Court, Samuel B. Sterrett, Chief Judge, holding that an author must capitalize expenses incurred between 1975 and 1987 in writing a book and depreciate them ratably over the estimated life of the income stream from the book.

Oakes, Meskill, and Mahoney, Circuit Judges.

Author: Oakes

OAKES, Circuit Judge:

These two cases, decided by the same Tax Court judge, involve the question whether an author during the taxable years after 1975 and before 1987 may deduct as business expenses the expenses incurred in writing a book, or whether the author must capitalize those expenses and depreciate them ratably over the estimated life of the income stream from the book. The Commissioner argues, and the Tax Court found, that section 280(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 280(a) (1982), requires capitalization rather than immediate deduction of an author's expenses. Section 280(a) states that "except in the case of production costs which are charged to capital account, amounts attributable to the production of a film, sound recording, book, or similar property which are otherwise deductible . . . shall be allowed as deductions only in accordance with the provisions of subsection (b) [requiring capitalization]." The Commissioner argues, again as the Tax Court found, that this language is unambiguous and that an author who writes a manuscript unambiguously "produc[es] . . . a . . . book." Because we think that this language is not unambiguous and may indeed relate to what a book publisher does rather than to what an author does, we look at the legislative history of section 280, originally written as section 210(a) of the Tax Reform Act of 1976 (the "Act"), Pub. L. No. 94-455, 90 Stat. 1520, 1544. When we do so, it is quite evident that the provision was aimed principally at tax shelter activity, namely production company tax shelter partnerships organized to produce films, sound recordings, or books, and by no means was intended to apply to an author's creation of the manuscript underlying the book to be published.

As to the separate question whether authors' expenses in writing manuscripts are deductible in the year incurred (for a cash basis taxpayer) under I.R.C. § 162, or must be capitalized under I.R.C. § 263, the cases that have dealt with the subject, as well as the underlying symmetry of the tax law and other factors with bearing, indicate rather plainly that these expenses are immediately deductible and not to be capitalized. Accordingly, we reverse, knowing that the Tax Reform Act of 1986 compels capitalization by authors for tax years 1987 and thereafter. The 1986 Act did so, however, with the Conference Report's statement that "no inference is intended as to the nature of these properties under present law," H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. II-308 n.1 (1986), so that we are not here concerned with the impact of the Tax Reform Act of 1986.

In a number of cases over the years, the Commissioner has argued the question whether an author or other artistic entrepreneur was engaged in a business or merely a hobby, on the one hand, or whether his or her expenses were ordinary and necessary as required for deductibility, on the other, all without apparent concern as to whether they were deductible as expenses or had to be capitalized.*fn1 Here, however, the Commissioner conceded that each taxpayer/author was in the trade or business of being an author, although the Government's briefs rather wistfully suggest that the concessions may have been improvident. And the Commissioner does not contest that the claimed expenses are ordinary and necessary. For our purposes, therefore, the only issue in both cases is whether the expenses are deductible for the tax years in which they were incurred or must be capitalized over the useful life of the book produced.

In the case of author Hadley the book of concern is The Empty Polling Booth, which was published in 1978, and in the case of author Garrison the book is Still a Distant Drum, which at the time of the writing of the briefs had still not been published. Garrison's case involves $3,055 worth of expenses incurred in calendar year 1980 attributable to his writing Still a Distant Drum, and Hadley's case involves $20,743 worth of expenses incurred in 1978 attributable to his book. Both authors had received previous advances for their books but in their respective taxable years received no advances or royalties. In both cases the Commissioner disallowed the deductions for expenses and the authors contested the resulting income tax deficiencies in the United States Tax Court before Samuel B. Sterrett, Chief Judge. The Tax Court first found against Garrison and then followed the Garrison decision in finding against Hadley, the decisions being reported as Garrison v. Commissioner, 86 T.C. 764 (1986), and Hadley v. Commissioner, T.C. Memo 1986-173, 1986 T.C. Memo 173, 51 T.C.M. (CCH) 948 (1986).

Stated succinctly, the Tax Court's view was that section 280 unambiguously requires amounts attributable to the production of a book to be "capitalized and deducted over the life of the income stream generated from the production activity." 86 T.C. at 766. The Tax Court said, "Since petitioner is an individual who incurred expenditures attributable to the writing of a book, those production costs clearly fall within the ambit of section 280." Id. at 766-67. Although the court held that it was unnecessary for it to look at the legislative history in depth because the statute was so unambiguous, it did note that Congress enacted section 280 in an attempt to curb tax shelters, particularly in the motion picture industry, citing S. Rep. No. 938, 94th Cong., 2d Sess. 71-79 (1976), reprinted in 1976 U.S. Code Cong. & Admin. News at 3507-3515. So saying, however, the Tax Court added that "while congressional action was directed primarily at motion picture shelters, there is no evidence that the legislative purpose was aimed exclusively at tax shelter activity." 86 T.C. at 767. The court then concluded that "having failed to find an unequivocal legislative purpose," it would refuse to interpret the statute in the manner suggested by petitioner Garrison "because to do so would be contrary to the clear language of section 280." Id.

We do not find the statute so clear or the legislative history so equivocal. The statute uses the words "production" and "book." There are many definitions of "book," but a principal one relates to the tangible property consisting of a collection of written, printed, or blank pages fastened together along one edge, bound between covers into a volume.*fn2 This kind of "book" one generally thinks of as being "produced" or "manufactured" by a book publisher. To be sure, we think of an author as "writing a book" and in a rather stilted fashion perhaps sometimes even as "producing" a book. Quite the more usual sense, however, is of an author "writing" or "authoring" a "manuscript" or "creating" a work, a piece of fiction, a volume of prose or poetry, or the like, which later becomes a book. In the general sense, authors are not engaged in the "production" of books -- book publishers are. Authors, rather, create the stuff of which books are made; they write manuscripts.

The Copyright Act of 1976, written at the same time as the Tax Reform Act of 1976 -- indeed, the two statutes were enacted fifteen days apart -- is phrased in these same terms. It states that

"Copies" are material objects . . . in which a work is fixed . . . and from which the work can be perceived, reproduced, or otherwise communicated . . . .

"Literary works" are works . . . expressed in words . . ., regardless of the nature of the material objects, such as books, . . . in which they are embodied.

17 U.S.C. § 101 (1982). Thus, Copyright Act protection subsists "in original works of authorship fixed in any tangible medium of expression . . . from which they can be perceived . . . . Works of authorship include . . . literary works . . . ." Id. at § 102(a). Or again, "the owner of copyright . . . has the exclusive right[] . . . to do and to authorize . . . [distribution of] copies . . . of the copyrighted work to the public by sale or other transfer of ownership . . . ." Id. at § 106. The Copyright Act, then, following what we believe is common parlance, draws a distinction between an author's literary work and the material objects in which the work is fixed or embodied, that is to say, the books produced by a publishing company.

It certainly cannot be said, as the Commissioner argues, that an author is unambiguously engaged in the production of a book when he writes a manuscript. Our conclusion is buttressed by the very language of Code section 280. It requires "amounts attributable to the production of a film, sound recording, book, or similar property" to be capitalized and written off under the income forecast method. "Film" is defined as "any motion picture film or video tape," I.R.C. § 280(c)(1), and "sound recording" as "works that result from the fixation of a series of musical, spoken, or other sounds," id. § 280(c)(2). The production of a film or sound recording thus may encompass, but certainly is not equivalent to, the writing of the film script or the composition of the music. So too, the production of a "book," which term is not defined, may encompass, but is not equivalent to, the writing of the manuscript. At least one cannot say that the equivalence is unambiguous. Therefore, following Learned Hand's injunction that "there is no surer way to misread any document than to read it literally," Guiseppi v. Walling, 144 F.2d 608, 624 (2d Cir. 1944) (L. Hand, J., concurring), aff'd, 324 U.S. 244, 65 S. Ct. 605, 89 L. Ed. 921 (1945), we will look to the purpose of the Tax Reform Act of 1976 in general and of section 280 in ...


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