BAILEY v. COMMISSIONER OF INTERNAL REVENUE
T.C. Memo. 2012-96
United States Tax Court.
Filed April 2, 2012.
Mr. Bailey refurbished only one yacht, the Spellbound, had difficulty selling it, and never used it as a prototype. Mr. Bailey's summaries show that the Spellbound generated a significant loss every year and a total loss of $922,137 over its brief four-year course. These factors—history of income or loss, and occasional profits—are moderately in the Commissioner's favor.
8. Financial status of the taxpayer
Substantial income from sources other than the activity in question, particularly if offset by claimed losses from the activity, may indicate that the activity is not engaged in for profit. On the other hand, a lack of income from sources other than the activity in question may make a profit objective more likely. 26 C.F.R. sec. 1.183-2(b)(8). Mr. Bailey's average gross income from his law practice and speaking services exceeded $1 million a year during the tax years at issue, and he claimed the activity's losses to significantly reduce his income tax liabilities.
Mr. Bailey concedes that he "had a solid income from other sources" but insists that he "did not purposefully arrange to lose money through aircraft rental operations". However, in determining whether, under section 183, an activity is engaged in for profit, greater weight is given to objective facts than to a taxpayer's mere statement of intent. Mr. Bailey could afford to maintain a yacht for his use even if there was no expectation of future profit.
This factor—financial status—is in the Commissioner's favor.
9. Elements of personal pleasure
The Commissioner contends that Mr. Bailey took a great deal of personal pleasure from sailing on the Spellbound with his family and friends, but Mr. Bailey claims that "[i]t's no fun to drive a boat". Mr. Bailey testified that the steering wheel and navigational instruments of the Spellbound are isolated from the rest of the deck, and the pilot is therefore isolated from the party-goers on the deck.