CPA runs aground on Tax Court's reading of hobby loss rules
A Florida CPA ran aground on the hobby loss rules in a recent Tax Court case.
Section 1.183-2(b) of the tax regulations provides a “non-exhaustive” list of factors used to determine whether an activity is engaged in for profit. The Tax Court applied this list to the yacht charter activity of Charles Steiner, a Florida CPA and businessman, and his wife to determine that they were not engaged in the business of charter activity with a profit objective, but instead were engaged in the activity “to partially offset the significant fixed costs of maintaining the yacht so it could be sold after they stopped using it for personal purposes.”
In the case, Steiner v. Commissioner, T.C. Memo 2019-25, the court noted that Steiner was a highly successful CPA and businessman. During the 1970s he acquired a number of companies, including an electrical supply business that grew to nearly 1,000 employees, and several hundred million dollars in revenue. He also acquired a communications company and a telephone recovery company.
In 2001 he and his wife purchased a 155-foot motor yacht, The Triumphant Lady, for $4,650,000,
The Triumphant Lady had a full-time captain and crew. In 2006 the Steiners undertook a $10,839,000 refit of the yacht, which was completed in 2009. In 2008 they hired Captain Bryan Pridgeon to complete the refit and pilot the yacht.
Until 2009 the Steiners used The Triumphant Lady exclusively for personal purposes. That all changed when a yacht broker approached them about making the yacht available for a charter.
The Steiners continued to use the boat for personal purposes until 2010, when they decided to sell it due to Mr. Steiner’s declining mobility and the couple’s financial concerns. They offered the boat for charter during this period, until January 2012 when the boat sold for $4,455,000.
During 2011 and 2012, the Steiners continued to pay Captain Pridgeon and the crew; they also paid docking, utility fees and management fees. They reported losses of $705,406 in 2011 and $122,420 for 2012, which they deducted from their income of $5,478,220 and $10,946,561 for 2011 and 2012, respectively. The IRS determined that the charter activity was not operated for profit and denied all but $164,690 of the 2011 loss and all of the loss deduction claimed for 2012.
After listing the tax regulation’s profit motive factors, the court decided in favor of the IRS, having found only one factor that applied to the Steiners: the “Personal Pleasure or Recreation” factor. In this case, it meant that, although the Steiners enjoyed boating, there was no indication that they derived recreation or pleasure from the charter activity.
Among the other factors is “carrying on an activity in a businesslike manner,” which may indicate a profit objective. The court said this factor favored the iRS because the Steiners’ tax reporting was not businesslike. They failed to deduct depreciation expenses to which they were entitled, and for 2010 deducted only $30 of charter-related costs even though the activity incurred significant expenses.