The Retirement Hobby
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Fact # 2
Swanson presents another typical situation: a retired taxpayer pursues a long-held hobby and find they can produce some income from it to offset its cost. That does not make it a business. Here, Mr. Swanson was a resident of Alaska who had retired in 2010. His retirement income came from his pension, from Social Security and from rents received on two properties he owned.
Mr. Swanson was apparently an avid fisherman. He had fished in Alaska for over 30 years. He liked fishing for halibut and he liked fishing from a town called Homer, the self-described “Halibut Fishing Capital of the World.” But he lived in Anchorage, some 200 miles away.
After retirement he bought a boat “designed to fish for halibut.” Op at 4. He was apparently able to store his boat and equipment for free in Homer because his “life partner’s children lived in Homer” (Id.). He also bought a plane “to shorten his travel time between Anchorage and Homer.” Id. He apparently was not already a pilot because Judge Pugh notes he held only a student license in the three years at issue (2014-2016). Id.
All of this cost money and Mr. Swanson decided offset his expenses by offering his boat for charter fishing under the name Happy Jack Charters (currently ranked #53 of 63 boat charters in Homer, AK on TripAdvisor). He made some money at it. During the three years at issue (2014-2016), he reported gross receipts of $1,500, $2,345, and $3,709, respectively. Op. at 7. But his reported expenses gave him net losses, totaling $131,000 over the three years.
Like Dr. Sherman, Mr. Swanson apparently was not very good at filing returns. He filed his 2016 return in June 2017 and his 2014 and 2015 returns in August 2017. It is not entirely clear from the opinion, but it appears he was prompted to file returns by an IRS audit. Apparently the IRS was concerned about unreported income. A Revenue Agent conducted a bank deposits analysis, finding deposits for each year exceeding reported income. That's not routine. The IRS sent him an NOD and Mr. Swanson hired a lawyer and petitioned the Tax Court.
Lesson #2: Don’t Be “Lazy On Your Books”
Unlike Dr. Sherman, Mr. Swanson at least had some income from his chartering activity. And he kept records.
Mr. Swanson at least kept receipts that “he would hand to his accountant at the end of the year ‘to figure it out.’” Op. at 10. But just having income and keeping receipts of expenses is not enough to show an activity is operated in a businesslike manner. Judge Pugh explains that “the key question is not whether the taxpayer keeps records, but whether the taxpayer uses his records to improve profitability and take steps to control expenses and increase income.” Op. at 10 (emphasis in original).
What hurt Mr. Swanson here was his poor recordkeeping. One gets a sense of it from this TripAdvisor review from May 2017: “We caught our limit of halibut. Only downside is he got ticketed by the water cops ... lazy on his books they said. Other than that, we really enjoyed the trip.”
Judge Pugh explains how Mr. Swanson was lazy on his books for tax purposes as well. He did not use his records to operate his activity like a business. “Mr. Swanson did not explain whether and how he used the data about his income and expenses to make his activity profitable. *** Mr. Swanson did not have a business plan and made no significant changes to reduce expenses and generate income the entire time he operated Happy Jack Charters. *** Despite the apparent lack of clients and income, Mr. Swanson purchased an airplane and incurred significant expenses related to storing, maintaining, and operating it.. Over the seven years of operating Happy Jack Charters, Mr. Swanson never made changes that enhanced his prospect for making a profit.” Op. at 10-11.
Bottom Line #2: Don’t be lazy on your books.
For thousands of years, human civilizations have been collecting taxes, in one form or another. From grain to beards to rubber balls, governments always found new ways to collect their due. Every April in the United States, predictable signs of spring appear: budding flowers, chirping birds, and … taxes. They may be as certain as death, but taxes aren’t a recent phenomenon; they date back thousands of years. Over the centuries, different governments all over the world have levied taxes on everything from urine to facial hair—and officials accepted payments of beers, beds, and even broomsticks. These payments went to fund government projects and services—from the pyramids of Giza to the legions of Rome. FIRST TAXES Taxation has existed for so long, it even predates coin money. Taxes could be applied to almost everything and might be paid with almost anything. In ancient Mesopotamia, this flexibility led to some rather bizarre ways to pay. For instance, the tax on burying a body in a grave was “seven kegs of beer, 420 loaves, two bushels of barley, a wool cloak, a goat, and a bed, presumably for the corpse,” according to Oklahoma State historian Tonia Sharlach. “Circa 2000-1800 B.C., there is a record of a guy who paid with 18,880 brooms and six logs,” Sharlach adds. Creative accounting of in-kind payments helped some cheat the tax man as well. “In another case, a man claimed he had no possessions whatsoever except extremely heavy millstones. So he made the tax man carry them off as his tax payment.” PHARAOHS' TAX PREPARATION Ancient Egypt was one of the first civilizations to have an organized tax system. It was developed around 3000 B.C., soon after Lower Egypt and Upper Egypt were unified by Narmer, Egypt’s first pharaoh. Egypt’s early rulers took a very personal interest in taxes. They would travel around the country with an entourage to assess their subjects’ possessions—oil, beer, ceramics, cattle, and crops—and then collect the taxes on them. The annual event became known as the Shemsu Hor, or Following of Horus. During the Old Kingdom, taxes raised enough revenue to build grand civic projects, like the pyramids at Giza. Ancient Egypt’s taxation system evolved over its 3,000-year history, becoming more sophisticated with time. In the New Kingdom (1539-1075 B.C.), government officials figured out a way to tax people on what they had earned before they’d even earned it, thanks to an invention called the nilometer. This device was used to calculate the water level of the Nile during its annual flood. Taxes would be less if the water level was too low, foretelling a drought and dying crops. Healthy water levels meant a healthy harvest, which meant higher taxes. TAX AMNESTY IN ANCIENT INDIA In India's Mauryan Empire (ca 321-185 B.C.) an annual competition of ideas was held—with the winner receiving tax amnesty. “The government solicited ideas from citizens on how to solve government problems,” Sharlach explains. “If your solution was chosen and implemented, you received a tax exemption for the rest of your life.” The Greek traveler and writer Megasthenes (ca 350-290 B.C.) gave an astonished account of the practice in his book Indica. Like most tax reform efforts, the system was far from perfect, Sharlach notes. “The problem is that nobody would have any incentive to ever solve more than one problem.” RENDER URINE UNTO CAESAR The Roman emperor Vespasian (r. A.D. 69-79) may not be a household name like Augustus or Marcus Aurelius, but he brought stability to the empire during a turbulent time—partly through an innovative tax on people’s pee. Ammonia was a valuable commodity in ancient Rome. It could clean dirt and grease from clothing. Tanners used it to make leather. Farmers used it as fertilizer. And people even used it to whiten their teeth. All this ammonia was derived from human urine, much of it gathered from Rome’s public restrooms. And like all valuable products, the government figured out how to tax it. Some wealthy Romans, including Vespasian’s own son Titus, objected to the urine tax. According to historian Suetonius (writing around A.D. 120), Titus told his father he found the tax revolting, to which Vespasian replied, “Pecunia non olet,” or “Money does not stink.” ITEMIZATIONS FOR AZTECS At its height in the 15th and 16th centuries, the Aztec Empire was wealthy and powerful, thanks to taxation. Historian Michael E. Smith has studied its tax collection system and found it to be remarkably complex, with different kinds of items collected at different levels of government. All taxes made their way to the Aztec central governing body, the Triple Alliance. There they kept meticulous records of who had sent what. Many of these records survive today. The most famous are found in the Matrícula de Tributos, a colorful illustrated registry filled with pictographs showing exactly how many jaguar skins, precious stones, corn, cocoa, rubber balls, gold bars, honey, salt, and textiles the government collected each tax season. RUSSIA’S FASHION TAX Widespread use of coins and currency had a leveling effect on taxation systems, but rulers were not above applying some taxation muscle to achieve their ends. In 1698, Russian reformer Peter the Great sought to make Russia resemble “modern” nations in western Europe whose clean, close shaves Peter equated with modernization. After he returned to Russia, the tsar instituted a beard tax on his citizens, who favored beards. Any Russian man who wished to grow a beard had to pay a tax—peasants paid a small fee while nobles and merchants could pay as much as a hundred rubles. Men who had paid the tax were also required to carry beard tokens wherever they went to prove that they'd paid their taxes for the privilege. Peter the Great’s beard tax did not last. Catherine the Great repealed it in 1772. Source: National Geographic By: Editors of National Geographic
Over the past year, we, as business owners, have been hearing that we will need to report our business to the federal government if we are of certain legal entities. That is true. Under the US Corporate Transparency Act, all limited liability companies (LLCs), companies or other entities formed via a Secretary of State office would have to file a report showing all owners who own 25% or more of the business’s equity. That would be direct ownership (via direct ownership) or via third party entities like a trust. A recent U.S. District Court case in Alabama has ruled the reporting, and the Act, unconstitutional. At this time the Department of Treasury says it will appeal the ruling but will also comply with the ruling meaning that reporting is suspended until further notice. Recently, a client sent us a copy of the reporting form sent to them by a third-party company telling them they had to file this or suffer severe penalties. That was true before the court ruling. The company was asking for a fee to file this form. I have no problem paying a company to do a job, but I have an issue when you get an email or mailing saying you must do something from a company that you or I know nothing about. That is my issue here. My firm and I are monitoring the situation and will let you know if you need to file it and when. If it becomes necessary to file, we will be able to help you file the appropriate form for a fee. Until then, please ignore anything you get saying you must file a form for Beneficial Ownership. If you have any questions, please contact my office.
If you’re a fan of home improvement shows, you know how this goes: The clients, usually a couple hoping to build, buy or renovate a home, are mostly focused on the aesthetics — the kitchen countertops, the bathroom tile, the light fixtures, the wainscoting. But, of course, there’s more to designing a home than picking the flooring or the fixtures. Without a strong foundation, sturdy walls and a dependable roof, the couple’s beautiful house won’t hold up well against the elements, age and other risk factors during the years their family lives there. Their real estate agent or contractor often has to remind them about what’s really important as they move forward. And I have to say, I get where those pros are coming from every time — because the same holds true for building a family’s financial house. (Though I’ve yet to see an entire television network devoted to designing a financial portfolio.) If you’re working with a financial adviser, you may have heard him or her refer to drawing up a “blueprint” for reaching your financial goals. And that’s an apt description. When you’re building your fiscal house, you’ll want to be sure you have a detailed plan that includes every aspect of your financial future and the methods and materials you’ll be using to help get you to your objectives. Your financial portfolio — the collection of assets you’ll use to create a safe and comfortable future — should be allocated and managed in a way that helps you weather economic downturns, market volatility, fluctuating interest rates, rising inflation, risks that come with aging and other changes in your life. Creating the blueprint for your financial house What should your financial blueprint look like? It will be different for everyone. But a secure fiscal house will have the same basic characteristics as a well-built home. A strong foundation Your most stable assets typically will form the foundation of your financial portfolio. Although no investment is without risk, these are generally assets you can count on to stay solid — and provide a reliable income — when the economy or your personal finances take a hit or feel shaky. Some examples include: Savings and certificates of deposit (CDs), which are protected by the Federal Deposit Insurance Corp. (FDIC) Government bonds, which are backed by the U.S. Department of the Treasury Fixed and fixed index annuities that are protected by a reputable insurance company. Sturdy walls The “walls” of your fiscal house should be sturdy — but because they can be repaired or rebuilt more easily than the foundation, these assets don’t have to be quite as invulnerable. Investments at this level can add value to your portfolio (by providing income, income protection and diversification), but they also may be exposed to moderate risk, so there’s some potential for growth. A few examples include: Corporate and municipal bonds Conservative dividend investments Private real estate investment trusts (REITs) A dependable roof Of course, you want your roof to hold up against whatever the elements might throw at it. But if it is damaged, you likely can fix or replace it without the whole house falling in — as long as the lower levels are built to last. The roof of your fiscal house represents the investments that carry the highest risk you can tolerate (both financially and emotionally). And they can help you grow your money for the future. These assets might include: Stocks Mutual funds Exchange-traded funds (ETFs) Variable annuities Where to start Of course, every individual and family has different needs — and every financial plan will (or should, at least) be a little bit different to accommodate those needs. But if you’re looking for a good starting point, you may want to use the “Rule of 100” to determine how your assets should be allocated when building your fiscal house. That means taking the number 100, subtracting your age and using the difference to determine the percentage of your money you want to invest in riskier assets to maximize growth. If, for instance, you’re 45 and in no rush to retire, you might feel comfortable investing 55% of your portfolio in stocks or ETFs. You’ll get the growth you’re looking for, but should you lose money in a market downturn, you’ll still have several years to recover. But if you’re closer to retirement — let’s say 65 — you may want to limit the risk in your portfolio to 35% or less. You still can benefit from some growth, but with less time to recover from a market decline, you may choose to play it a bit safer. Don’t forget ongoing maintenance Making occasional upgrades and repairs can be an important part of maintaining your home’s value. And the same holds true for your portfolio. It can be helpful to reevaluate your investments and investing strategies at least once a year to be sure your plan stays aligned with your goals. Over time, asset allocations may shift based on market performance, and you may need to rebalance your portfolio. You also may find that your tolerance for risk has changed, and a little remodeling is necessary. Or, if you realize your original design just isn’t functional for your family, you may want to seek a second opinion or go for a complete renovation. You don’t have to look hard to find an example of why it’s so critical to design and maintain your fiscal house for the long haul. Just a few short years ago, pretty much everyone’s financial portfolio was doing well thanks to an 11-year bull market. Then in March 2020, the COVID crisis rolled in and caught everyone off guard. And we all got a good reminder of how important it is to build a fiscal house that holds up against the storms we can predict — and those we can’t. Is your fiscal house move-in ready? One thing we’ve all learned from watching home improvement shows is that doing it yourself isn’t always the best way to go. Similarly, some parts of investing may be doable on your own — and even fun. And you should have plenty of input into what you want from your plan. But you’ll likely find it makes sense to work with a pro when you’re drawing up your overall financial blueprint — or making any big choices or changes. Mistakes and oversights can be costly, especially when you’re closing in on retirement. You’ll need a portfolio that’s carefully planned to keep you secure for the many years ahead. Kim Franke-Folstad contributed to this article. The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way. Kurt Supe, John Culpepper and Brian Quick offer securities through cfd Investments, Inc., Registered Broker/Dealer, Member FINRA &SIPC, 2704 South Goyer Road, Kokomo, IN 46902, 765-453-9600. Kurt Supe, Andrew Drufke and Brian Quick offer advisory services through Creative Financial Designs, Inc., Registered Investment Adviser. Creative Financial Group is a separate and unaffiliated company. The CFD Companies do not provide legal or tax advice. Credit: ANDREW DRUFKE
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For thousands of years, human civilizations have been collecting taxes, in one form or another. From grain to beards to rubber balls, governments always found new ways to collect their due. Every April in the United States, predictable signs of spring appear: budding flowers, chirping birds, and … taxes. They may be as certain as death, but taxes aren’t a recent phenomenon; they date back thousands of years. Over the centuries, different governments all over the world have levied taxes on everything from urine to facial hair—and officials accepted payments of beers, beds, and even broomsticks. These payments went to fund government projects and services—from the pyramids of Giza to the legions of Rome. FIRST TAXES Taxation has existed for so long, it even predates coin money. Taxes could be applied to almost everything and might be paid with almost anything. In ancient Mesopotamia, this flexibility led to some rather bizarre ways to pay. For instance, the tax on burying a body in a grave was “seven kegs of beer, 420 loaves, two bushels of barley, a wool cloak, a goat, and a bed, presumably for the corpse,” according to Oklahoma State historian Tonia Sharlach. “Circa 2000-1800 B.C., there is a record of a guy who paid with 18,880 brooms and six logs,” Sharlach adds. Creative accounting of in-kind payments helped some cheat the tax man as well. “In another case, a man claimed he had no possessions whatsoever except extremely heavy millstones. So he made the tax man carry them off as his tax payment.” PHARAOHS' TAX PREPARATION Ancient Egypt was one of the first civilizations to have an organized tax system. It was developed around 3000 B.C., soon after Lower Egypt and Upper Egypt were unified by Narmer, Egypt’s first pharaoh. Egypt’s early rulers took a very personal interest in taxes. They would travel around the country with an entourage to assess their subjects’ possessions—oil, beer, ceramics, cattle, and crops—and then collect the taxes on them. The annual event became known as the Shemsu Hor, or Following of Horus. During the Old Kingdom, taxes raised enough revenue to build grand civic projects, like the pyramids at Giza. Ancient Egypt’s taxation system evolved over its 3,000-year history, becoming more sophisticated with time. In the New Kingdom (1539-1075 B.C.), government officials figured out a way to tax people on what they had earned before they’d even earned it, thanks to an invention called the nilometer. This device was used to calculate the water level of the Nile during its annual flood. Taxes would be less if the water level was too low, foretelling a drought and dying crops. Healthy water levels meant a healthy harvest, which meant higher taxes. TAX AMNESTY IN ANCIENT INDIA In India's Mauryan Empire (ca 321-185 B.C.) an annual competition of ideas was held—with the winner receiving tax amnesty. “The government solicited ideas from citizens on how to solve government problems,” Sharlach explains. “If your solution was chosen and implemented, you received a tax exemption for the rest of your life.” The Greek traveler and writer Megasthenes (ca 350-290 B.C.) gave an astonished account of the practice in his book Indica. Like most tax reform efforts, the system was far from perfect, Sharlach notes. “The problem is that nobody would have any incentive to ever solve more than one problem.” RENDER URINE UNTO CAESAR The Roman emperor Vespasian (r. A.D. 69-79) may not be a household name like Augustus or Marcus Aurelius, but he brought stability to the empire during a turbulent time—partly through an innovative tax on people’s pee. Ammonia was a valuable commodity in ancient Rome. It could clean dirt and grease from clothing. Tanners used it to make leather. Farmers used it as fertilizer. And people even used it to whiten their teeth. All this ammonia was derived from human urine, much of it gathered from Rome’s public restrooms. And like all valuable products, the government figured out how to tax it. Some wealthy Romans, including Vespasian’s own son Titus, objected to the urine tax. According to historian Suetonius (writing around A.D. 120), Titus told his father he found the tax revolting, to which Vespasian replied, “Pecunia non olet,” or “Money does not stink.” ITEMIZATIONS FOR AZTECS At its height in the 15th and 16th centuries, the Aztec Empire was wealthy and powerful, thanks to taxation. Historian Michael E. Smith has studied its tax collection system and found it to be remarkably complex, with different kinds of items collected at different levels of government. All taxes made their way to the Aztec central governing body, the Triple Alliance. There they kept meticulous records of who had sent what. Many of these records survive today. The most famous are found in the Matrícula de Tributos, a colorful illustrated registry filled with pictographs showing exactly how many jaguar skins, precious stones, corn, cocoa, rubber balls, gold bars, honey, salt, and textiles the government collected each tax season. RUSSIA’S FASHION TAX Widespread use of coins and currency had a leveling effect on taxation systems, but rulers were not above applying some taxation muscle to achieve their ends. In 1698, Russian reformer Peter the Great sought to make Russia resemble “modern” nations in western Europe whose clean, close shaves Peter equated with modernization. After he returned to Russia, the tsar instituted a beard tax on his citizens, who favored beards. Any Russian man who wished to grow a beard had to pay a tax—peasants paid a small fee while nobles and merchants could pay as much as a hundred rubles. Men who had paid the tax were also required to carry beard tokens wherever they went to prove that they'd paid their taxes for the privilege. Peter the Great’s beard tax did not last. Catherine the Great repealed it in 1772. Source: National Geographic By: Editors of National Geographic
Over the past year, we, as business owners, have been hearing that we will need to report our business to the federal government if we are of certain legal entities. That is true. Under the US Corporate Transparency Act, all limited liability companies (LLCs), companies or other entities formed via a Secretary of State office would have to file a report showing all owners who own 25% or more of the business’s equity. That would be direct ownership (via direct ownership) or via third party entities like a trust. A recent U.S. District Court case in Alabama has ruled the reporting, and the Act, unconstitutional. At this time the Department of Treasury says it will appeal the ruling but will also comply with the ruling meaning that reporting is suspended until further notice. Recently, a client sent us a copy of the reporting form sent to them by a third-party company telling them they had to file this or suffer severe penalties. That was true before the court ruling. The company was asking for a fee to file this form. I have no problem paying a company to do a job, but I have an issue when you get an email or mailing saying you must do something from a company that you or I know nothing about. That is my issue here. My firm and I are monitoring the situation and will let you know if you need to file it and when. If it becomes necessary to file, we will be able to help you file the appropriate form for a fee. Until then, please ignore anything you get saying you must file a form for Beneficial Ownership. If you have any questions, please contact my office.