Once again, cometh taxpayers before the Tax Court, trying to pass muster on what the government thinks are “fun and games,” and therefore losing the related deductions.
Ed and Lydia Heinbockel are the latest to try their luck — dubbed by the Tax Court as “a happy couple possessed by entrepreneurial spirit.”
Nice, but not quite enough to sustain some tax deductions — related to Ed’s airplane chartering business, Lydia’s personal shopping business, and the two of their purported vineyard business, and intra-family loan activities.
Ed bought an airplane in 2004, ostensibly for business purposes. Unfortunately, his loan agreement indicated that it was bought for personal use (whoops!), and Ed rarely used the plane for business trips, and he had no unrelated clients. Needless to say, this “business” wracked up tens of thousands of losses in 2005 through 2007, which Ed deducted.
Another little acquisition in 2004 was a vineyard in neighboring wine country. Despite the hiring of an architect and purchase of a tractor, the folks never actually planted a single vine, and they later sold the property, after reporting operating losses during the intervening years (some occasioned by legal opposition raised by their neighbors and the county).
Then came the loan to Lydia’s brother in connection with his purchase of a rental property. This ill-fated venture also eventuated into some litigation involving Lydia, creating at least, in part, more than a $25,000 loss in 2005.
The Court seemed a little unconvinced as to the merits of the Heinbockel’s pleas, finding that there was no profit motive associated with the purchase of the airplane, no lending business related to the real estate deal with the brother, no grape farming business, and, frankly, no legitimacy to the deductibility of a bunch of Lydia’s expenses related to her personal shopping business, due mainly to poor record-keeping.
Let this be a lesson to those of you who think that virtually anything you do involving your money is somehow a “business” which Uncle Sam would like to subsidize. Check the IRS regulations which set forth the facts and circumstances analysis which IRS will perform if they check you out, including:
The manner in which the taxpayer carries on the activity,
The expertise of the taxpayer and his advisors,
The time and effort expended by the taxpayer in carrying on the activity,
The expectation that assets used in the activity may appreciate in value,
The success of the taxpayer in carrying on other similar or dissimilar activities,
The taxpayer’s history of income or losses with respect to the activity,
The amount of occasional profits, if any, which are earned,
The financial status of the taxpayer, and
The presence of personal pleasure or recreation.
CONSULT YOUR TAX ADVISER - This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation. Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He may be reached at 831-7288, welcomes comments at firstname.lastname@example.org, and invites readers to consider his other commentary at http://blog.nolo.com/taxes.