Assessment of Petitioners' Federal Income Tax Liabilities for 2012 and 2013
Respondent assessed deficiencies in petitioners' Federal income tax liabilities for 2012 and 2013 totaling $ 8000 by 2014 by legislative notice of deficiency.
Question to be Addressed
The question to be addressed in this memo is whether the petitioners' fishing boat charter service was conducted for profit or as a hobby and whether it was appropriate to tax it.
Facts of the Case
Any evidence has been conditioned and can be found in the situation. The petitioners in the case John Brown and Kathy Brown are husband and wife. They reside in Rochester, New York; near Lake Ontario. Kathy is a CPA while John has in the past worked with an insurance firm. When their firm moved in 2009 to a different location, they resolved neither to move with the firm nor to seek new employment.
Ownership of a Charter Boat
Given the fact that John was an avid fisherman with an experience of 15 years, he owned a large Chris-Craft fly-bridge boat which you used to charter to paying parties. It is also clear that despite his experience in fishing, he had never operated a charter boat service and knew little about the business aspects of such operations.
Steps Taken to Legally Operate the Charter Boat
However, the details of the case became clear when in 2010; the first year of charter activity, John and Kathy came up with a business plan, opened a bank account for the charter events, established a bookkeeping practice, and obtained insurance to cover the running license, a New York sporting trolling license, and a seller's permit. These licenses and permits were necessary to legally operate a charter boat.
Initial Challenges and Restructuring
What followed was a post in the local dailies related to sports fishing in which John said that served three to four half-day paying parties each week. He also mentioned that the fact that he repaired his boat on his own proved costly. It got established then from the analysis that in the first two years, the activity incurred losses. It was then restructured to improve profitability by increasing advertising, participating in outdoor shows and negotiating small contracts with local businesses. The restructuring resulted in a small profit in 2012 and 2013.
Change in John's Employment and Increased Expenditure
In 2014, John got a full-time job in another insurance company. However, he still took two paying parties and one non-paying a (promotional one) each week throughout the fishing season. The expenditure increased and they lost $8000 in the activity in 2014 on your Federal income tax return which was unfortunate.
Determination of Deductibility of Losses
The first issue of determination is whether Section 183 limits the deductibility of losses from the supplicants' charter boat facility in 2012 and 2013. Like it was held in the case of John R. and Kathleen M. Zwicky v. Commissioner 1984 PH T.C. the case bears resemblance to this of the Browns. It is critical to determine if Section 183(b) will apply in your case. The section clearly states that if a person's undertakings are "not engaged in for profit," only those deductions permissible irrespective of if an objective to make gain exists and might get claimed. If a taxpayer realizes gross income from the conduct of the activity, he can deduct all expenses attributable thereto up to the amount of gross income less those deductions allowed irrespective of a profit objective. A presumption that the activity they were engaged in for profit will arise if the gross income derived from the activity exceeds the deductions attributable to it for two or more years in a period of five consecutive years (Burton 247). Because John and Kathy sustained losses in the years 2012 through 2013, they are not entitled to rely on this presumption.
Engagement in the Activity for Profit
The second issue is whether the Browns were engaged in the activity for profit, which would allow all expenses related to the activity be deducted under Sec. 162 (Brownlee 116). Since their activities with the boat were meant to bring in profit from the beginning, then despite the losses, they are entitled to deductions.
Works Cited
Brownlee, W. Elliot. Federal Taxation in America. Cambridge University Press, 2016.
Burton, Hughlene A., and Stewart Karlinsky. "Complexity of tax simplification: USA perspective." The Complexity of Tax Simplification. Palgrave Macmillan UK, 2016. 247-265.
