Five Landmark Court Cases Every Freelancer Should Know

Tax law is not built entirely by Congress. Some of the most important rules freelancers rely on were shaped in courtrooms, by real people arguing with the IRS over real deductions. These five cases created precedents that still affect how self-employed workers file their taxes today.

Every case here is a published federal court decision. The facts, holdings, and citations are drawn from the actual opinions.

1. Cohan v. Commissioner (1930): The Broadway Composer Who Lost His Receipts

George M. Cohan was one of the most famous entertainers of the early twentieth century. He wrote "Give My Regards to Broadway," "You're a Grand Old Flag," and dozens of other songs. He also spent heavily on entertaining actors, agents, and others in the theater business, and he kept almost no records of any of it.

When the IRS audited him, Cohan could not produce receipts or documentation for thousands of dollars in business entertainment expenses. The IRS disallowed everything. Cohan appealed to the Second Circuit Court of Appeals, where Judge Learned Hand wrote the opinion.

The court's reasoning was straightforward. It was obvious that Cohan had incurred real business expenses. He was one of the most active entertainers in New York. Disallowing every dollar because of imperfect records, in the court's words, would amount to "penalizing" the taxpayer for failing to keep perfect documentation of obviously real costs. The court allowed Cohan to deduct a reasonable estimate of what he had actually spent, bearing heavily against the taxpayer whose inexactitude was his own fault.

That decision became the Cohan Rule, and it still applies today.

What this means for freelancers: If you lose your receipts but can show credible evidence that a business expense actually happened, you may be able to deduct a reasonable estimate. Bank statements, calendar entries, client invoices, and credit card records all help build your case. But be aware of the major exception: Congress later enacted Section 274(d), which requires strict documentation for travel, meals, and listed property (like vehicles). For those categories, the Cohan Rule does not apply. No records means no deduction, period.

The lesson is practical. Keep your receipts. But if disaster strikes and records are lost, the Cohan Rule is the reason all is not necessarily lost with them.

2. Commissioner v. Groetzinger (1987): The Full-Time Gambler Who Proved He Had a Real Business

Robert Groetzinger lost his sales job of twenty years in early 1978 and spent the rest of the year gambling on dog races full-time. He went to the track six days a week, spent 60 to 80 hours per week studying racing forms, and devoted himself entirely to the activity. He had no other employment. He reported his gambling on Schedule C as a trade or business.

The IRS disagreed. Their position was that gambling, by its nature, could not be a "trade or business" under the tax code.

The case reached the United States Supreme Court, which ruled in Groetzinger's favor. The Court established a two-part test for what qualifies as a trade or business: the taxpayer must be involved in the activity with continuity and regularity, and the taxpayer's primary purpose must be for income or profit, not recreation.

Groetzinger met both prongs. He gambled full-time, he treated it with the same seriousness as a job, and he clearly intended to make a living from it. The Court declined to impose any additional requirement that the activity involve selling goods or services to others.

What this means for freelancers: The Groetzinger test is the standard the IRS still uses to determine whether your activity is a "trade or business." It does not matter whether your work looks conventional. What matters is whether you pursue it with regularity and continuity and whether your primary purpose is earning income. A freelance artist, a full-time day trader, a self-employed consultant working from a coffee shop: the same test applies. If you treat your work as a real business, the court is more likely to treat it that way too.

3. Commissioner v. Soliman (1993): The Case That Changed the Home Office Deduction

Dr. Nader Soliman was an anesthesiologist who worked at several hospitals in the Washington, D.C. area. None of the hospitals provided him with office space. He used a spare room in his home exclusively for administrative tasks: billing, bookkeeping, correspondence with insurance companies, reading medical journals, and managing his practice.

He claimed a home office deduction. The IRS denied it, arguing that his "principal place of business" was the hospitals where he actually performed anesthesia, not his home. The case went all the way to the Supreme Court, which sided with the IRS.

The Court applied a two-factor test. First, what is the relative importance of the activities performed at each business location? Second, how much time is spent at each location? Since Soliman's core professional work happened at the hospitals, his home office was not his "principal place of business," even though it was the only place where he handled the administrative side of his practice.

The decision was widely criticized. It effectively denied the home office deduction to millions of self-employed people who performed their primary work at client sites, job sites, or other locations but did all their business administration from home.

Congress responded. In 1997, it amended IRC Section 280A to add a new provision. Under the current law, a home office qualifies as your "principal place of business" if you use it regularly and exclusively for administrative or management activities and you have no other fixed location where you conduct those activities. This fix was a direct legislative response to the Soliman decision.

What this means for freelancers: If you are a freelance photographer who shoots on location but does all your editing, invoicing, and client communication from a home office, you qualify for the deduction under the post-Soliman rules. The same applies to consultants who work at client sites, contractors who work on job sites, and performers who rehearse and play at venues. As long as your home office is where you handle the administrative and management functions of your business, and you do not have another fixed office elsewhere, the deduction is available. Dr. Soliman lost his case, but he changed the law for everyone who came after him.

4. Popov v. Commissioner (2001): The Violinist Whose Living Room Was Her Principal Place of Business

Katia Popov was a professional violinist in Los Angeles. She performed with the Los Angeles Chamber Orchestra and the Long Beach Symphony and recorded for film and television studios, none of which gave her a place to practice. She lived with her husband and young daughter in a one-bedroom apartment and used the living room exclusively as her practice studio: recording equipment, sheet music, a chair, and four to five hours of practice every day. No one slept or played there.

On their 1993 return the Popovs deducted 40% of the rent and 20% of the electricity as a home office. The IRS disallowed the deduction, and the Tax Court agreed, reasoning that her principal place of business was wherever she performed, not where she practiced.

The Ninth Circuit Court of Appeals reversed. Applying the Supreme Court's Soliman test, the court found that comparing the importance of practicing and performing gave no clear answer - daily practice is essential to playing at a professional level - so the time factor controlled. Because Popov spent far more hours practicing at home than performing or recording elsewhere, the living room was her principal place of business and the deduction was allowed.

What this means for freelancers: A home workspace can qualify even when the visible, revenue-generating part of your work happens somewhere else, as long as the space is used exclusively and regularly for the business and the Soliman factors (relative importance and time) point home. Since 1999 the statute has also made this easier: a home office qualifies as the principal place of business if you use it for administrative or management activities and have no other fixed location for them (IRC §280A(c)(1)). Popov is still the leading case for creative professionals whose real work happens in a home studio.

5. Nickerson v. Commissioner (1983): The Farm That Lost Money for Years but Was Not a Hobby

Melvin and Naomi Nickerson lived in Chicago, where Melvin ran a self-employed advertising business. At forty, worried that his "youth oriented" career would not last, he decided dairy farming would be his second act. After years of searching, the Nickersons bought a run-down 80-acre former dairy farm in Door County, Wisconsin (adding 40 more acres a year later), leased the tillable land to a tenant farmer who agreed to reclaim ten acres a year, and spent most weekends of the growing season - a five-hour drive each way - rebuilding the farmhouse and barn by hand. They did not expect a profit for roughly ten years, and they lost money in 1976 and 1977. The IRS disallowed the losses as hobby losses, and the Tax Court agreed.

The Seventh Circuit Court of Appeals reversed. Walking through the nine factors in Treas. Reg. §1.183-2(b), the court held that the Tax Court had asked the wrong question. A taxpayer does not have to expect a profit from the current level of activity; it is enough to have a genuine expectation that today's work will lead to a profitable operation later. The Nickersons had a real plan (the tenant-farmer reclamation agreement), studied trade journals and agricultural extension materials, put in "prodigious" effort, and got no recreation out of the place - there was nothing to enjoy but work.

The court emphasized that start-up losses are not inconsistent with a profit motive, and that the expectation of profit need only be honest, not reasonable. Notably, the Nickersons did not keep formal books - they kept receipts and cancelled checks - which shows how the factors are weighed together rather than as a checklist.

What this means for freelancers: If your freelance business has been losing money, the IRS may eventually question whether it is a real business or a hobby under Section 183. The Nickerson decision shows that consistent losses are not fatal to your case as long as you operate like a genuine business. Keep proper books. Have a real business plan. Make changes when things are not working. Consult with professionals. Document everything. The nine-factor test looks at how you conduct the activity, not just whether it has turned a profit yet. If you are running a legitimate business that happens to be in a difficult early phase, the law is on your side, but only if your records prove it.

The Thread That Runs Through All Five

These cases span seven decades and cover everything from Broadway entertainment expenses to a violinist's home practice studio. But the same principles keep appearing.

The courts care about substance over form. They want to see real business activity, genuine recordkeeping, and honest reporting. Taxpayers who operated professionally and documented their work tended to win. Taxpayers who were sloppy, self-serving, or unable to explain their own numbers tended to lose.

The tax code is not static. When courts get it wrong, or when the law produces results that do not make sense, Congress can step in and change the rules, as it did after Soliman. Understanding these cases is not just academic. It is practical knowledge about the rules you file under today and where those rules came from.

Good records are the foundation of every single one of these outcomes. That has not changed since George Cohan walked into court in 1930.

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Sources

• Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930) - Established the Cohan Rule for estimating deductions when records are lost
• Commissioner v. Groetzinger, 480 U.S. 23 (1987) - Supreme Court decision defining "trade or business" under the tax code
• Commissioner v. Soliman, 506 U.S. 168 (1993) - Supreme Court decision on home office "principal place of business" test
• IRC Section 280A(c)(1) - Home office deduction rules, amended in 1997 in response to Soliman
• Popov v. Commissioner, 246 F.3d 1190 (9th Cir. 2001) - Ninth Circuit decision allowing a home office deduction for a musician's exclusive practice space
• Nickerson v. Commissioner, 700 F.2d 402 (7th Cir. 1983) - Seventh Circuit decision on hobby loss and the Section 183 nine-factor test
• IRC Section 183 - Statutory basis for hobby loss rules
• IRC Section 274(d) - Strict substantiation requirements that override the Cohan Rule