PS238: Superheroes and Tax Deductions

PS238 is a long-running comic series by Aaron Williams that is available online and in print.  The comic is set at the titular public school, which is a special school for children with superpowers, called metaprodigies.  Earlier this month we got an email from Sean asking us to take a look at PS238, and there are legal issues aplenty.  We’re going to start with a bit of tax.  Very minor spoilers below.

(Since we’re talking about tax, we should reiterate our disclaimer: this is a discussion of a fictional scenario, not legal advice, and does not constitute the formation of an attorney-client relationship.  If you need tax advice, hire a lawyer or an accountant.)

I. The Setup

One of the students at PS238, Tyler Marlocke, doesn’t have superpowers, but he’s enrolled there because his superpowered parents are certain that he’ll develop superpowers any day now.  To give him a fighting chance against the other children (particularly in gym class), the school assigns him a mentor: The Revenant, a gadget-based superhero.  During one of his training sessions he goes to the Revenant’s home, which is located above a high-end gym for people with superpowers.  The Revanant explains the unusual location thus:

Keeping a bunch of exercise equipment at home just clutters the place and since “vigilante detective” isn’t covered under the tax code, keeping my “office” at home isn’t deductible.

The naturally raises the question: would a superhero’s headquarters be tax deductible, and if not, why not?

II. Superhero Tax Deductions

What the Revenant is referring to is the fact that many (but not all!) business expenses are tax deductible.  Home offices (i.e. a proportional share of the rent or mortgage payment) can also be tax deductible, but it’s tricky to get right and can possibly increase the risk of an audit.  The situation gets even more complicated when considering “mixed purpose expenditures” that are both profit-oriented and personal (e.g. traveling for business but also to visit friends or relatives).  In the Revenant’s case, an important question is whether his vigilante detective activities are for-profit or are merely a hobby. The general rule is given by 26 U.S.C. § 183(a):

In the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.

§ 183(b)(1) expands on the general rule slightly, allowing “the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit.”  This includes deductions for real property tax payments, mortgage interest payments, casualty losses, theft losses, and personal items such as charitable contributions and medical expenses.  It does not, however, include business expenses or a home office.

Going a little further, § 183(b)(2) states that certain deductions for not-for-profit activities are allowed to the extent that income from the activity exceeds the deductions available under § 183(b)(1).  Since most superheroes don’t make any money from their heroics, however, that effectively means no additional deductions.

“For profit” means more than just wishing for a profit.  The case law speaks in terms of “a bona fide expectation of economic gain,” having the “primary purpose … to make a profit” or the “dominant hope and intent of realizing a profit” or a “reasonable potential for profit.”  Estate of Baron v. C.I.R., 798 F.2d 65, 72 (2d Cir. 1986).  Anything else is usually called a hobby, although it doesn’t  have to be done for pleasure.  See, e.g., Krause v. C.I.R., 99 T.C. 132 (1992).

The IRS has developed nine factors used to determine whether an activity is for-profit:

(1) Manner in which the taxpayer carries on the activity.
(2) The expertise of the taxpayer or his advisors.
(3) The time and effort expended by the taxpayer in carrying on the activity.
(4) Expectation that assets used in activity may appreciate in value.
(5) The success of the taxpayer in carrying on other similar or dissimilar activities.
(6) The taxpayer’s history of income or losses with respect to the activity.
(7) The amount of occasional profits, if any, which are earned.
(8) The financial status of the taxpayer.
(9) Elements of personal pleasure or recreation.

T.R. § 1.183-2(b).  Several of these factors weigh against the Revenant (and indeed most superheroes), and it seems likely that his activities would be considered a hobby rather than an activity carried on for-profit.  What’s more, a home office must be used for a trade or business, which requires more than just a  for-profit activity.

III. Conclusion

The practical upshot of all of this is that the Revenant should hire an accountant.  Certain deductions may be made despite the non-profit nature of his crime fighting activities (e.g. real property tax on his office, casualty losses from destruction of equipment).  But he’s probably correct that the IRS would not consider his “vigilante detective” activity to be a business, and his office probably could not qualify as a home office if it were part of his house.  The same is true of many other superheroes, including, most obviously, Batman.

20 Responses to PS238: Superheroes and Tax Deductions

  1. I am not familiar with this series but how would the Revenant’s tax situation change if part of him vigilante detective business focused on apprehending criminals with government rewards like the FBI most wanted list or collecting rewards for bail jumpers. How significant a portion of his time would need to be spent on these activities for the IRS to consider this a business and not just a hobby?

    • I don’t know that there’s a definite answer. It’s very fact-dependent. The nine factor test is just that: a multi-factor test. No one factor controls the answer, but the more time he spends on it, the more money he makes, the more of a profit he makes, the more he relies on that income as his primary source of income, and the more it’s a job and not just a hobby, then the more likely it is to be treated as a for-profit activity.

  2. Christopher L. Bennett

    Are “business” and “hobby” really the only categories? What about a non-profit organization or a charity? I’d think that would be the most likely category for superhero work. Don’t they get any tax consideration?

    • The tax treatment for non-profits is different, but he would have to formally organize as a non-profit. The snippet we have suggests that he hasn’t, although he probably should.

      • Except he might run into problems attempting to do so, as the Revenant apparently (from issue 16) is wanted in thirty-three states. I think the paperwork for tax exemption requires filing a contact address, which would give a place to serve subpoenas, which he would then have to make the effort to deal with or evade.

      • That’s a very good point! I hadn’t gotten that far in the series, so I didn’t know his wanted status. Yes, that would make things very difficult.

  3. I’m also not familiar with the series, so I don’t know if this is an issue in this universe. But are the identities of the superheroes knows? Would the Revenant pay taxes on both his gym and his home as the Revenant, or does he have some other identity that he uses to pay his property taxes on his home? Since if he uses two different identities, that would probably also preclude him from claiming his “home office” in his home (like it would for Batman, since the Gotham authorities don’t know that they are the same person/ that the Batcave is attached to Wayne Manor – assuming Bruce Wayne’s accountants don’t find enough loopholes to get him out of paying taxes entirely. Bruce being a billionaire and all, he could probably finagle things, though he may still want to pay taxes out of a sense of civil duty.)

    • To clarify: I don’t think the Revenant owns the gym.

      In the series there seems to be substantial government support of—and to a lesser extent regulation of—superheroes. Superheroes still keep their real identities secret, but I suspect the government can handle dual identities confidentially. PS238 itself is an example. The children there have secret identities as part of their training for life as an adult superhero (although some will inevitably grow up to be villains). But the school knows their real identities and the real identities of their parents.

      In Batman’s case: yes, he probably loses out on a lot of potential tax advantages. For example, he couldn’t claim a casualty loss if the Batmobile was destroyed by a supervillain, since he can’t file separately as Batman and of course Bruce Wayne can’t claim it without giving away the game.

      • Leor Blumenthal

        The Revenant does own the gym in question, just not as “The Revenant”. Over the course of the 50+ issues of PS238 (and possibly in the original short story by Michael Stackpole where he first appeared) it is revealed that the Revenant does not just have one secret identity, he has over a dozen identities that he switches between as needed. (He always fights criminals as the Revenant though.)

        The Revenant is more likely to outright break the law than other heroes; in the story where he first appeared he broke into a compound owned by a religious doomsday sect (think Branch Dividian with mutants) to rescue a boy from him mother (who had joined the cult) and reunite him with his father. The mother, who had legal custody, called other heroes to stop the Revenant, including one modeled on Captain America. The Revenant, in defiance of the courts (and the secret help of a Superman type) gets the boy to his father. No wonder he’s wanted in 33 states! On the plus side, he’s saved Earth, alien worlds and alternate realities multiple times. In his eyes it all balances out. :)

      • There is significant government funding for superheroes that reveal their secret identities and qualify. Exactly how it works isn’t really handled. There are some groups like the Nuclear Family (think The Fantastic Four gone horribly, horribly wacky in a wonderful way) or Atlas (the PS238 version of Superman) that seem to be almost completely government funded. Other groups, like Tyler’s own parents, seem to fund their crimefighting through merchandizing, gifts, patents, etc.

        The Revenant seems to be motivated primarily by a desire to challenge the preconception that you need superpowers in order to fight supercrimes. He also LOVES fighting giant lizardmen who throw bombs. He’s not the sort of hero that turns to outside support unless he absolutely has to, which is one of the reasons that Tyler is so good for him. It’s teaching him a bit about working with others in ways that don’t involve manipulating them from behind the scenes, as he did with the staff of PS238 before the series started.

        I have to say that I’m disappointed that I haven’t seen my favorite comment from the Revenant thus far though: “I sometimes think that access to cash is the greatest superpower of all.”

      • Leor Blumenthal

        @Gary: Don’t forget that government goodies come with a lot of strings attached in the PS238 Universe. Atlas’ funding allowed him to be a full time superhero, but the Feds controlled the rights to his codename, costume and merchandising rights. When the real Atlas returned to his homeworld of Argos to learn of his heritage, the government promptly created a new Atlas by giving the costume and name to another Argosian (albeit one who is not really suited to being a hero).

        The biggest case of “strings attached” is PS238 itself; its creation involved some delicate negotiations, an attempted coup by Congress, the president resigning and the Revenant punching out a villain with ice powers (not necessarily in that order). The school still has political rivals who would love to shut it down, but so far the faculty have triumphed against them.

      • @Leor My impression of the whole Forak debacle was that Atlas tended to discourage the crazy-eyed gentlemen with world destroying rays, and the presence of anyone as Atlas, particularly someone perceived to be as powerful because he’s the same sort of alien, would help keep them from blowing up the planet while its most powerful hero was back home. The fact that he was entirely dependent upon the government because he doesn’t know anyone, doesn’t understand the local culture, and has about as much backbone as a paramecium is mostly just gravy.

        As for the strings attached to PS238, that’s mostly just being a Federally funded institution. Schools in particular have to deal with everything that the staff at PS238 does, it’s just emphasized because it’s completely Federal and they teach kids with superpowers.

    • Bear in mind that Revenant is a pretty direct Captain Ersatz (I won’t link TVTropes, but it’s there if you’re not familiar with the term short version: stealing a character, in this case for parody, without quite trademark infringing) of Batman. He operates much more in the shadows and around the law than other heroes in the universe, and it’s made pretty obvious that his non-hero identity is Bruce Wayne-level rich.

      • I’d gotten far enough along to see that he was wealthy (has to afford his gadgets somehow), but it wasn’t yet clear to me just how wealthy he was, especially since he was concerned with tax deductions for a relatively small office.

        It’s probably more of an issue for other superheroes. For example, Peter Parker must spend a decent chunk of change on supplies for his web shooters, but he can’t claim that as a business expense. If his identity were public (as it was for a time), then he could possibly claim the portion he uses when taking pictures of himself fighting villains, since selling those pictures is his primary source of income, but not the rest.

      • As a gadget using hero, there will of course be parallels with Batman (the most famous of the subset). However, he is specifically a character created by Michael Stackpole (I believe) and is used with permission. As far as being a trope, the Revenant is more of a archtype than a direct parody.

        Also, several of his non-hero identities are rich. One of his complaints is that he feels that as long as one of ONE of his identities pays taxes, the other TWELVE shouldn’t have to…

  4. To be fair, I do not think the Revanent’s comment was all that serious in context. I do read the series online, and this is more an “arson, murder, and jaywalking” sort of list than a serious issue. I don’t think tax deductability (or lack thereof) is an ACTUAL concern for him; he was making a somewhat flippant comment as a final bit of explanation why he isn’t bothering to have it at his home.

    PS238 is at least mildly tongue-in-cheek about a lot of stuff.

    That said, I agree, his superheroing is probably not tax deductable.

    I’m curious what these other “many” legal issues James hinted at are; not that I doubt they’re there, but none spring to mind and my lack of legal expertise means some will doubtless surprise me.

  5. James Pollock

    There are two obvious cases I would like to have seen more examination of (although at danger of hijacking the article). Power Man and Reed Richards. Power Man because he is, of course, a Hero for Hire. Reed because his public identity and private business both seem hopelessly intertwined in the Baxter Building, but mostly because it was disclosed that the Fantastic Four has corporate form, to which Richards assigns the royalties from his many inventions.

    Housing and meals are deductible by the corporation and not reportable as income to the employee if they can establish that the corporation is providing them for the corporation’s benefit rather than for the employee’s. Clothing is similar, but stricter. I think the Reed and the other “employees” of the FF can make a case for all three. Since they don’t draw a salary, I don’t think Richards is paying any income taxes (as an individual) but also could face challenges later in life, as he is probably also not vested in Social Security.
    (PS, relating back a few weeks, I think that when Richards says that his lawyer, Matt Murdock, “handles” all his patents, he means that Murdock hires a patent agent to file them, and then handles the assignments and licensing of them himself. Of course, this interpretation creates a new potential problem, as if the FF had a disagreement with Richards, Murdock would be conflicted out of representing either of them.)

  6. Amusingly, it has since been revealed that the Revenant, in one of his secret identities, worked for a while as an accountant in order to catch a mob boss. He was apparently quite good at it, and used his spare time on the job to deduce that a certain well-known travel writer was actually an invulnerable alien superhero … because the guy left an amazingly detailed fake paper trail on his “travel” activities (largely for tax purposes), but he never bought sunscreen. So the Revenant can, it seems, do other heroes’ taxes for them. He might just be his own accountant. (For more details on the sunscreen thing, see Stackpole’s novel “In Hero Years … I’m Dead.”

  7. I guess “titular” is taking on a secondary meaning of “eponymous”, but I prefer the unambiguous term. If someone says that Isaac Asimov was the titular editor of Asimov’s SF Magazine in its early years, would they be saying that he didn’t do any actual editing, or just that it was named after him?

    • If you want to be prescriptivist about it: the second meaning of titular is not the same as eponymous. Eponymous is limited to a thing named for a person or the person after whom the thing was named. Titular, by contrast, includes things after which other things are named.

      In this case, eponymous might be the less ambiguous word to use if the school were called, say, “Roosevelt High School” or somesuch, but PS238 cannot be called the comic’s eponymous school. It can, however, be called the comic’s titular school. And so it was.

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