A Footnote That Authors Find Heavily Taxing

Book publishing is a unique and in many ways anachronistic institution, more in tune with the 19th Century than with the 20th. An author is an independent artisan, each of whose works, like a jeweler’s piece, is marketed separately through the medium of the publisher. The publisher is an entrepreneur and, to some extent, a provider of risk capital. He bears the cost of physical production and distribution, but not of research or intellectual creation.

This is a vital distinction, understood by very few people. No other industry is conducted in this fashion. The market clearly does not and cannot support the approximately 60,000 new titles that appear annually. Publishers survive by producing many titles in small printings--usually from 3,000 to 10,000 copies--adding up to a cumulative total of hundreds of thousands or millions of copies for each publishing house.

But the individual author, who may receive as little as $3,000, or perhaps $30,000 if he is “established,� for a work that has taken him two or three years to complete, cannot make a living this way. The Authors Guild reports that the median income of its members in 1980 (the latest year for which figures are available) was $7,900.

Thus, writers are subsidizing publishers. This is important to remember, because in any one year authors may have substantial expenses on a project from which they derive little and perhaps no income.

Traditionally they have been able to deduct these expenses as they occur and against their total income. But then came the case of Arthur T. Hadley, an author and journalist. In 1978 Hadley had incurred almost $21,000 in expenses in the preparation of a book on which he had received but a small, $4,000, advance in 1977 and no income in 1978. The Internal Revenue Service took him to court.

Interpreting a section of the 1976 Tax Reform Act, the IRS said that expenses must be prorated according to annual expected income on a book, film or recording, and that each project must be treated as a separate entity.

Under this concept, an author who in 1986 received payment of $10,000 on a work that he estimates will earn him a total of $30,000 could deduct no more than 33.3% of his expenses on that book during the year; if he had no income from a manuscript in preparation, he could not, in the view of the IRS, deduct any expenses, no matter how substantial these might have been. If he has more than one project under way, as is quite likely, with each requiring separate bookkeeping and different percentages, his accounting would become fiendishly complex.

On May 19 the U.S. 2nd Circuit Court of Appeals, having delved into the difficulties of authorship, ruled against the IRS in the Hadley case. The Tax Court had disallowed these expenses against other income, but the Appeals Court held that “in an activity as ephemeral as writing a book the difficulty in estimating a future income stream . . . appear(s) immense.� The court said that the 1976 law had been aimed primarily at tax shelters and had not been intended to apply to authors.

The catch was, the three-judge panel said, that the applicable section in the 1976 act had been superseded by a footnote added by the Treasury staff in the 886-page Senate-House conference report on the 1986 Tax Reform Act. This footnote, of which apparently no one outside the staff had been aware, defined “films, sound recordings, video tapes, books, and other similar property embodying words, ideas, concepts, images or sounds,� as tangible property, and went on to say that “the uniform capitalization rules apply.�

In effect, books and films were placed in the same category as machinery and tractors.

“Congress says it can be done. Ours is not to reason why,� the judges noted.

But can it, or, more pertinently, should it be done? Common sense says that the act of creation--whether of a book, a painting or a musical composition--cannot be equated with mass manufacture and must be separated from the printing of copies, which are mass-produced but which the author does not own and over whose production he has no control. Our patent and copyright laws recognize that the creative process is intangible, for they do not protect ideas, concepts, images or words, but only the final product that emerges.

Authorship is an anomaly in that, by and large, it is not commercially justifiable for the writer. This is a fact that has long needed stating and recognizing. If authors are to be willing to continue to produce under these circumstances, they should not be pummeled by the tax laws by being prohibited from deducting their expenses as they occur, even though in some cases these may exceed their remuneration. The issue is now before the tax-writing House Ways and Means Committee, which should look at the eminently sensible conclusions of the 2nd Circuit Court of Appeals, and write them into the code.