More Mistakes Artists and Small Businesses Make at Small Claims Court

Even though small claims court handles small claims pressing your claim can be a large challenge. Here are a few mistakes artists and small businesses make which an experienced attorney like Rich and can help you avoid.

Putting too much trust in certified mailing service executed by the Court

Just because a plaintiff paid the Court to serve the Defendant doesn’t mean they were actually served properly. Defendants (including businesses) often refuse to sign for certified mail. If this happens, service is incomplete and a plaintiff must serve them again. It is important to check with the Court to see if they actually received the signature card for mailing the complaint via certified mail. If they didn’t, they must be served again.

Not serving the Defendant within the required time frame

Each jurisdiction has certain limited time period for when a defendant can be served. It is possible to only find out that a first attempt at service was a failure after the time period to serve the defendant has elapsed. In DC small claims court, a defendant needs to be served within 60 days from when a complaint has been filed. What should a plaintiff do if the time period to serve the defendant has elapsed? The plaintiff needs to request an alias summons which will reset the time period to serve the defendant.

Not being able to determine if the defendant is in the military

If a plaintiff is awarded a default judgment, they are required to file a service member affidavit. The service member affidavit is a sworn statement which generally explains either whether or not the defendant is active duty military and how the plaintiff knows this. The reason why these are required is because of the Service Members Civil Relief Act which is intended to prevent default judgments from being taken against active duty military members.

The Department of War runs a website which allows peoples military status to be checked if a plaintiff has their last name, social security number or birthday. If a plaintiff has neither of those things, there are third party services which can lookup someone’s military status with less information but will charge a fee. A plaintiff can also swear to a defendant’s military status based on their own personal knowledge. If plaintiff has spoken to the defendant (or anyone with knowledge) personally about what their job is, that could be sufficient.

When should a business be a hobby?

The federal tax benefits for running business are large and well known. Businesses are allowed deductions on federal income taxes for ordinary and necessary expenses, owners of businesses are allowed qualified business interest deductions, businesses are allowed bonus depreciation, section 179 deductions for certain property put into service, and so on. Given the many benefits available to running a business, it might surprise you to learn that many people have taken the position with the IRS that their activity was not a business but a hobby. See Batok v. Commissioner, T.C. Memo. 1992-727 and Spiegelman v. Commissioner, 102 T.C. 394 (1994). In those cases, the taxpayer argued the activity was not carried with continuity or regularity. Id.

To be clear, there are more factors which courts and the IRS consider whether an activity can be considered a business or a hobby. Recently, the U.S. Tax Court issued a decision in Young v. Commissioner, which went over what the IRS considers when characterizing an activity as a hobby or a business. See Young v. Comm’r, T.C. Memo. 2025-95.

In Young, the court explained one of the inquiries used to determine if an activity is a hobby or a business is if the activity was engaged with the intent to make a profit. Id. at 25. The intent to make profit must be in good faith but need not be reasonable. Id. To  be clear, an activity does not actually have to make a profit. It just must be carried on with the intention of making one. Citing Treas. Reg. § 1.183-2(a) the court listed the nine non-exhaustive factors that are considered when determining whether an activity was intended to make a profit. Id. Those factors are:

(1) the manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or the taxpayer's advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on similar activities; (6) the taxpayer's history of income or loss with respect to the activity; (7) the amount of occasional profits, if any; (8) the financial status of the taxpayer; and (9) whether elements of personal pleasure or recreation are involved. 

The likely reason why the taxpayers in the tax court cases which characterized their activity as a hobby as opposed to a business is to avoid self-employment tax. Income from hobbies is not subject to self-employment tax (federal income tax still applies to hobbies). 

Another reason why a taxpayer might be alright with characterizing their activity as a hobby is if their expenses are the costs of goods sold. While it is true as general manner hobby expenses are not deductible on federal income taxes, costs of goods sold are subtracted from gross receipts in order to calculate gross income. Thus, if an activity’s only costs are costs of goods sold, losing out on  the business expense deduction is minimal.

Another reason why a taxpayer might want to characterize their activity as a hobby is if they are receiving a benefit which is income dependent For example, if you are under full retirement age social security benefits will be reduced if a tax payers earns wages above $24,480 if they reach retirement age after 2026 (it is $65,160 if they reach retirement age in 2026).

What does this mean for artists, musicians, and other aspiring entrepreneurs? It is important to check in with a tax expert as you start a new venture. There may be a basis to characterize it as a hobby and achieve a greater benefit than if it were characterized as a business.

3 Mistakes Artists and Small Business Owners Make at Small Claims Court

No one wants to go to small claims court. Unfortunately, sometimes it cannot be avoided. Here are three mistakes small business owners (including artists and musicians) make when taking their case to small claims.

1. Not hiring a lawyer when you actually need one

   While it is always beneficial to have then advice of counsel, there are some situations where a person must hire a lawyer if they wish to recover money or defend themselves. Some jurisdictions (like Washington D.C. and Federal Courts) require retaining a lawyer if the dispute is between a person’s business entity (like an LLC or S-Corp) and another party.

   2. Not serving the right person

   In order to recover from a business entity (like an LLC or S-Corp), the business entity must be served properly. Each state requires the designation of an agent who is authorized to accept service on behalf of the entity. The address of the designated agent should be searchable on a state agency’s website. It is critical to serve the designated agent because anything short of that will not be sufficient for a case to proceed. Even if an entity has actual notice of a lawsuit, they still must be served properly.

   3. Not planning on enforcing the judgment

   Even if a person (or entity) wins at small claims court, a defendant is not required to pay the plaintiff on the spot. After winning a judgment, a person (or entity) must enforce it. This requires new court filings, serving the defendant again, and a new court date. This should be accounted for when considering a settlement. Is it worth taking less money in a settlement rather than wait to enforce a judgement in the future that a defendant might not be able to pay? It can be a difficult decision. Anything can happen. A defendant may have money at the moment, but none in the future for a variety of reasons. People need to understand how long the entire process takes before declining a settlement.

Can the New York District Attorney Seize Art in Other States?

A New York State Supreme Court issued a seizure order for artwork from Austrian artist Egon Schiele titled Russian War Prisoner. see Matter of Art Inst. of Chicago, 85 Misc. 3d 1265(A), 2025 NY Slip Op 50617(U) (Sup. Ct., N.Y. County Apr. 23, 2025).  Even though the painting was no longer in New York and the Art institute took no action to receive or possess the painting in New York, the Court found that it has jurisdiction under CPL 20.20 because the crime of knowing possession of stolen property was the same in New York and Chicago and that there was a conspiracy to possess stolen property between the dealer that sold it in New York and the eventually the Art Institute of Chicago. Id. at 31, 32.

The Court’s approach has several problems. First, CPL 20.20 deals with jurisdiction over people and not property. The Art Institute points this out in their appeal brief to the First Department. see Pet’r’s Br. 21, Matter of Art Inst. of Chicago (2025-04496, U.S. July. 22, 2025). The Art Institute also points out that CPL 20.20(1)(a) refers to conduct that has occurred within the state to establish an element of the offense and that New York Courts have only allowed criminal jurisdiction over defendants for conspiracy who committed acts in further of the conspiracy in New York. Id. at 22. The Art Institute also referenced People ex rel. Simpson Co. v. Kempner, 208 N.Y. 16 (1913) which held that where property has been taken by a search warrant from the possession of a third person, and there is a controversy between the person from whom it is claimed that the property was stolen and the third person the dispute cannot be determined upon a criminal process. Id. at 25. The Art Institute also noted that the New York Attorney General has issued an advisory opinion that New York Penal Law Section 450.10 cannot be used to resolve contested claims of ownership in the absence of a criminal case. Id. see Pet’r’s Br. 27, Matter of Art Inst. of Chicago (2025-04496, U.S. July. 22, 2025). The Art Institute also correctly pointed out that one of the few court cases cited by the Judge in support of their decision to exercise jurisdiction was taken out of context. Id. More specifically, in the decision cited by the Judge, the Court explained in dicta that:

“Penal Law § 450.10 . . . provides a mechanism for returning allegedly stolen property to an owner prior to, or during the pendency of, a criminal proceeding, [and] requires proof of title before property in the custody of the People or the court can be returned. Thus, a civil-like proceeding would have to be commenced in this case to return the paintings to the rightful owners under either CPL 610.25 (2) or Penal Law § 450.10--regardless of the outcome of the People’s case.” see Id. at 29.

This clearly means a separate civil action is required to establish title before a court can take possession and return property, which did not happen in  Matter of Art Inst. of Chicago.

The New York City District Attorney's Office’s response to did not address many of these points. The DA’s Office’s answer consisted mostly of procedural arguments that the Art Institute waived their substantive positions. Resp’t’s Br. 10-18, Matter of Art Inst. of Chicago (2025-04496, U.S. October 31, 2025). The DA acknowledges Kempner, but argues it is distinguishable because it was about private parties, not the People, obtaining a search warrant based on later superseded procedural rules. Id. at 14. A warrant issued for property based on criminal has the same effect whether it was applied for by the district attorney or a person. The Kempner decision and the DA’s response do not explain why there would be a distinction between the two. The DA’s also acknowledges the Art Institute correctly quotes the New York Attorney General that New York Penal Law Section 450.10 cannot be used to resolve contested claims of ownership in the absence of a criminal case, but only notes that this opinion informal and addressed a warrantless seizure by police. Id. The DA fails to explain why New York Penal Law Section 450.10 would prevent the use of a warrantless seizure of property without criminal case but allow a seizure with a warrant. The statue does not say this at all.

The DA’s strangest argument was: “AIC cites no other controlling authority that clearly bars Justice Drysdale’s seizure of the painting and consequent holding of turnover proceedings.” Id. at 14. Is it really incumbent on individuals to prove the State does not have power to act? Doesn’t the State have the duty to show where they have the authority to act, before they act? The 10th Amendment states “the powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The 14th amendment states “nor shall any State deprive any person of life, liberty, or property, without due process of law”

One issue which was not addressed by the DA or the Art Institute was that the crime of knowing possession of stolen property was not the same in New York and Chicago. In New York, Criminal Possession of Stolen Property in the First Degree under PL § 165.54, occurs when someone “ knowingly possesses stolen property, with intent to benefit himself or a person other than an owner thereof or to impede the recovery by an owner, and when the value of the property exceeds one million dollars." In Illinois, a person is guilty of the crime of theft when they obtain “control over stolen property knowing the property to have been stolen or under such circumstances as would reasonably induce him or her to believe that the property was stolen” These are not the same thing. The Court’s decision mentions that when the painting was sold in New York, the provenance or the pre-war history of the painting was not discussed. Matter of Art Inst. of Chicago, 85 Misc. 3d 1265(A), 2025 NY Slip Op 50617(U) (Sup. Ct., N.Y. County Apr. 23, 2025) at 7. How could someone have knowingly possesses stolen property, if they were never informed that they were stolen? Furthermore, if the painting was never knowingly possessed as stolen in New York, there could not have been a conspiracy to knowingly posses it in Chicago.

Buying Government Art? Get all the Records.

Lights Across the Lake by Maxim H. Lubovsky

PHOTO CREDIT GSA\Sean Flanagan

In a recent art law decision from a New York district court, Philip Ellis Foster’s claim of ownership of Lights Across the Lake by Maxim H. Lubovsky over the federal government was rejected. see Philip Ellis Foster v. United States, No. 1:22-cv-04496 (JLR) (S.D.N.Y. Mar. 21, 2025) at 15. When Foster tried to sell the painting , it was taken by the GSA, which claimed it was still government property because it was commissioned by the WPA in 1938. Id. at *1. The Court gave a lengthy discussion on the law governing property of the Federal government. Id. at *10. The United States government can only relinquish property by explicit acts. Id. The Court referenced a few decisions that upheld the Federal government asserting its property rights after decades of inaction. For instance, in Int'l Aircraft Recovery, L.L.C. v. Unidentified, Wrecked & Abandoned Aircraft, the court held that the government retained title to a Navy torpedo bomber that someone had tried to salvage after it had crashed about fifty years earlier. Id. at *11. In United States v. Steinmetz, the Court held that a bell that was submerged for seventy years until a British diver recovered it was still the property of the United States. Id. at *11.

In Foster’s case, it was undisputed that the federal government owned the painting when it was made. Id. at *12. It was also undisputed that a federal agency authorized the sale of surplus materials after World War II was over. Id. However, the Court was not convinced that the completed and framed painting Foster bought qualified as “surplus material.” Id. The Court noted that surplus property was not sold to private purchasers without first being offered to other federal agencies and tax-supported entities. The Court credited an expert who testified he was not aware of any document memorializing a sale of any WPA artwork by the Government. Id. at *17. The Court discounted Foster’s reliance on various correspondence that implied finished paintings were surplus property and second-hand accounts that the WPA sold finished paintings. These accounts were given minimal weight because they were second-hand, lacked sufficient particularity, or lacked indicia of reliability to support a finding, by a preponderance of the evidence, that the Government undertook authorized sales of completed WPA paintings to members of the public. Id. at *21. The Court also declined to draw an adverse inference against the government regarding the lack of any written records for the disputed painting because there was no evidence that the records existed and were destroyed, or that the government had a specific duty to keep them decades after the painting was finished. Id. at *25–26.

Foster was certainly a sympathetic plaintiff. He made what he likely believed to be a legitimate purchase from a dealer who also likely believed they made a legitimate purchase when they acquired the painting. Sympathy was no match for the massive amount of precedent stating the government owns property until it explicitly says otherwise. I found it noteworthy how much weight the Court gave to the lack of evidence of a record of a sale of a painting nearly ninety years ago. It would seem to be a matter of common sense that not all sales were properly recorded in 1938. It is also likely that even some of the sales that were recorded were lost. While Foster may be able to get his money back from the dealer he bought the painting from, it will be increasingly difficult for every previous buyer to recover their investment due to the substantial amount of time that has passed since it left the government’s possession.

I was also surprised with how quickly the Court dismissed the notion of laches as a defense to the government’s claim on the painting. It was incorrect for the Court to quote United States v. California for the proposition that “the United States government cannot extinguish its property interests through negligence, laches, acquiescence, or a failure to act” (Id. at 25), without acknowledging that the Second Circuit (by which it is bound to follow) has held as recently as 2005 that laches can apply to claims of the federal government. See Cayuga Indian Nation of N.Y. v. Pataki, 413 F.3d 266, 278–79 (2d Cir. 2005). In Cayuga Indian Nation of N.Y., the Second Circuit explains that it follows the Seventh Circuit's reasoning in United States v. Admin. Enters., Inc., 46 F.3d 670 (7th Cir. 1995), which stated that laches can apply to the federal government in three situations: first, "that only the most egregious instances of laches can be used to abate a government suit"; second, "to confine the doctrine to suits against the government in which ... there is no statute of limitations"; and third, "to draw a line between government suits in which the government is seeking to enforce either on its own behalf or that of private parties what are in the nature of private rights, and government suits to enforce sovereign rights, and to allow laches as a defense in the former class of cases but not the latter." Id. at 278 (quoting Admin. Enters., 46 F.3d at 673). In Cayuga Indian Nation of N.Y., the Court found that laches applied to the federal government's claim because the delay represented an egregious instance, as the event that caused the suit happened 200 years ago. See Cayuga Indian Nation of N.Y., 413 F.3d at 279.

While the ownership of Foster’s painting arose from an incident less than 200 years ago, the government’s inaction still spanned an arguably egregious amount of time. Clearly, buyers and attorneys advising buyers need to be extremely cautious when considering purchasing artwork once owned by the government. The explicit act which caused the government to relinquish ownership must be clear and unambiguous. Otherwise, they risk losing their investment and can only hope for an equitable remedy.