Tax Court Finds Pilot Did Not Have a Profit Motive in Aircraft Business

A taxpayer was denied current deductions and a net operating loss arising from his claimed business related to a restored vintage World War II fighter plane in the case of Kurdziel v. Commissioner, TC Memo 2019-20.  The Tax Court agreed with the IRS that the losses were barred by what is referred to as the hobby loss rule under IRC §183.

Image by By RuthAS - Own work, CC BY 3.0

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Moline Requirement to Recognize Existence of Entity Applies to S Corporations per IRS Memo

The IRS issued a memorandum (CCA 201747006) that takes the position that the Court of Claim’s 2011 opinion in the case of Morton v. United States, 98 Fed. Cl. 596 (2011), is in error when it takes the position that, for an S corporation, an entity doesn’t have to be strictly recognized as unique form its owners. Rather, the memorandum argues that the opinion should not have distinguished the treatment of S corporations from that given by the U.S. Supreme Court in the case of Moline Properties v. Commissioner, 319 U.S. 436 (1943).

Moline generally holds that a taxpayer is not able to ignore the existence of separate entities that he/she has set up when analyzing a tax issue.  Rather, each entity is treated as a unique entity from the taxpayer’s perspective and the taxpayer must live with the consequences of that fact.  Unlike the IRS, the taxpayer was involved in creating the structure in question.

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Commenting that Hobby Loss Regulation is Goofy, Seventh Circuit Reverses Tax Court and Finds Horse Racing Operation Run With a Profit Motive

The Seventh Circuit Court of Appeals, reversing the Tax Court, held in the case of Roberts v. Commissioner, CA7, Case No. 15-3396, found that Merrill Roberts had operated his race horse operation with a profit motive for all years and not just beginning in a specific later year.  But in doing so Judge Posner could not resist in pointing out his view on the unworkable nature of the regulations that are provided to guide making the decision.

Mr. Roberts, a successful businessman, had acquired race horses in 1999 but not until 2005 did he decide to build a larger training facility and “ramp up” the business, a business that generated losses.  In the original case the Tax Court found that there was not a business until 2007, so that his losses in 2005 and 2006 were subject to the hobby loss rule.

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Taxpayer's Injuries Did Not Move Tax Court to Find That Her Horse Operation Had a True Profit Motive

Taxpayers who are doing well in one endeavor may wish to engage in an endeavor they enjoy generally, but which arguably could be conducted with an eye towards making a profit.  When taxpayers continue to engage in such activities despite a lack of actual profit, the IRS quite often turns to Section 183 to deny the taxpayer’s the ability to claim such losses.

Such was the issue in the case of Kaiser v. Commissioner, T.C. Summ. Op. 2016-13.  Linda Kaiser ran a successful financial consulting and insurance business, but she had an interest in training Hanoverian horse.  The Court noted that she was “competent dressage rider and from 1998 to 2014 she owned between one and four horses.

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