The report released last week by Inspector General Isabel Mercedes Cumming on her investigation into the travel and private businesses of Baltimore State’s Attorney Marilyn J. Mosby raised a question that, in my opinion, only the Internal Revenue Service can answer definitively.
The question is whether it was proper for Mosby to claim a loss from those businesses for tax purposes when it appears from her own statements, and those of her spokesperson and lawyers, that she was not actively soliciting clients or trying to earn income from the businesses.
Last July, The Brew reported that Mosby had registered three business entities under her name: Mahogany Elite Enterprises LLC, Mahogany Elite Consulting and Mahogany Elite Travel.
According to Mosby, she added the three companies to her financial disclosure statement only after she was alerted by the Maryland State Ethics Commission that The Brew had reviewed her statement and she realized that she had not disclosed her businesses.
Her spokesperson, Zy Richardson, told The Brew that Mosby had no plans to operate the companies while she was the state’s attorney. That prompted Joanne Antoine, executive director of Common Cause Maryland, to ask a question:
“If you formed the LLC and are not going to be working it, then why did it need to be formed right now? Why not wait until after your term?”
It was a good question, and the report issued by the IG supplies a possible answer.
It appears that the formation of the businesses was timed so that Mosby could use travel expenses from her businesses to reduce her tax liability while in office. Under the appropriate circumstances, there would be nothing wrong with that.
No Clients or Revenue
Most of Mosby’s travel expenses in 2019 were paid by outside organizations. The formation of her businesses allowed her to claim a business loss that consisted, in part, of travel expenses related to her private businesses for which she was not reimbursed.
Any profit from her businesses is taxable to Mosby in the year earned.
Conversely, a loss may be used to reduce the taxes that she pays on her other income, including her $238,772 salary as state’s attorney – subject to the condition that she can demonstrate that she ran her businesses during the year “with an actual and honest objective of making a profit” even if no profit was made.
And therein lies the rub.
The IG report confirmed The Brew’s reporting that Mosby’s companies had no clients, employees, contractors or revenue. What the companies did have, we now find out, were travel expenses. Shortly after they were formed in 2019, Mosby claimed $3,795 in travel expenses incurred in the course of running her businesses, the IG report reveals.
Included in those expenses was the airfare for both her and her husband, Nick Mosby, then a state delegate, to travel from a prosecutors’ convention in San Jose, Calif., to Tampa, Fla.
The reason for the trip to Tampa and the role that Nick Mosby plays in his wife’s businesses were not included in the report.
The IG reported that in 2019 Mosby claimed a loss from her businesses totaling $5,000, consisting of the $3,795 in travel plus $1,205 in legal and professional fees. She certified, as required on Schedule C of her federal tax return, that she “materially participated” in the businesses during the year. The report gives no description of the nature of her participation.
As described by the IG, Mosby apparently considered the loss subject to the $5,000 first-year limit on amortizing business “start-up costs” after business operations begin. Regardless of the nature of the expenses, a loss from a business cannot be claimed on Schedule C unless that business was actively conducted with the objective of earning income in the year that the loss was claimed. Before business operations begin, start-up costs generally are not tax-deductible.
The IRS considers a number of factors to determine if a business is being run for profit, including whether the owner is putting in the time and effort necessary to turn a profit. The IRS also considers an owner’s business plan.
Mosby’s current term of office ends in January 2023. In other words, if she sticks with her current “business plan,” she will have at least four consecutive years with no clients and no income, only travel expenses.
The state’s attorney herself has supplied what may be the most clear evidence that she is not actively trying to make money from her three companies.
In her letter dated July 20, 2020 asking Cumming to investigate what Mosby described as “misleading and erroneous” reporting by The Brew, she wrote:
“I ask that you verify that I have not taken on a single client for these companies, nor have I taken in any money. Any insinuation to the contrary is false, misleading, and unethical.”
As recently as Friday, Mosby’s lawyers stated in their letter to the IG that her companies are “not operational. . . and not yet conducting business.” By “not operational,” do her lawyers mean that the businesses have existed only on paper since they were established?
Taking Mosby at her word, it appears that she does not want to earn any income from her businesses until after she leaves office when the businesses become “operational.” It does appear, however, that she wants to use the businesses for purposes of generating losses that reduce her tax liability while she remains in office.
Mosby invited the IG to investigate her to “fully exonerate” her of any wrongdoing in connection with her travel and her private businesses. Instead, the IG uncovered an issue that only the IRS can resolve with certainty.
Mosby’s lawyers stated that the tax deduction was approved by a tax professional. Fair enough, but her accountant or tax lawyer is not the final authority on the matter.
In the spirit of transparency, Mosby should request a letter ruling from the IRS on whether she can claim business losses during years in which she makes no attempt to solicit clients or earn income and then share that ruling with the public.
That way the IRS can finish the “full investigation. . . [of] my financial disclosures and travel” that Mosby requested back in July.
– David A. Plymyer retired as Anne Arundel County Attorney in 2014 and also served for five years as an assistant state’s attorney for the county. His email is firstname.lastname@example.org; Twitter: @dplymyer.