BAILEY v. COMMISSIONER OF INTERNAL REVENUE
T.C. Memo. 2012-96
United States Tax Court.
Filed April 2, 2012.
The record does not show the type or quality of the records that Mr. Bailey kept for BEI and PBR (or the three activities that he conducted through them). Mr. Bailey initially stored all of his records for BEI and PBR at his law offices in Palm Beach, Florida. In 2000 he moved those records to an airplane hangar at the Palm Beach County Park Airport in Lantana, Florida ("the Lantana hangar"), which he had used for the conduct of the airplane rental and manufacturing activities. (As we explain below, these records were destroyed sometime after June 2002.)
Mr. Bailey used "Quicken" software to maintain registers for his several personal and business accounts and to generate various summaries and reports of the information in those registers. Using this software, he or his staff entered deposits and expenditures, coded according to source or category, and various reports could thereafter be printed out using these data. Our record includes Quicken printouts of registers and summaries for three of the years (1996, 1999, and 2000), and the data they show appear to correspond generally to the amounts reported on Mr. Bailey's returns for those years.
Mr. Bailey's airplane rental activity
Mr. Bailey rented small airplanes to the general public through BEI during 1993 and part of 1994—an activity the IRS contends was not engaged in for profit. Mr. Bailey generally stored those airplanes in the Lantana hangar. After Mr. Bailey merged BEI into PBR in 1994, he sold off most of the small airplanes and ceased the rental activity. On his returns for 1993 and 1994, Mr. Bailey reported losses from this activity. On audit, the only portions of the claimed losses that the IRS disallowed were for expenses of $6,425 in 1993 and $3,850 in 1994 that cannot be substantiated.
Mr. Bailey's yacht rental activity
In 1989 PBR purchased a used Chriscraft Roamer yacht from a bank in Rhode Island. Mr. Bailey christened the yacht the Spellbound, and PBR refurbished it, with the services of Dennison Marine (a yacht manufacturing company and a client of his law practice) and the Roscioli Yachting Center. Mr. Bailey hoped to use the Spellbound as a prototype to refurbish and sell other used yachts, but at trial he did not prove how serious that hope was, nor how critical it was to his purchase and refurbishing of the yacht. During the refurbishing process, the Spellbound's plumbing, electronics, and heating and air-conditioning systems were all replaced. With the help of Ann Dennison, a decorator at Dennison Marine, Mr. Bailey personally redesigned the interior layout of the Spellbound. He fitted the yacht with new carpeting, wall coverings, and furniture. When the Spellbound was fully refurbished (before the years at issue), it was built to Mr. Bailey's specifications, and he considered it beautiful.
In 1993 Congress repealed the luxury tax (which had applied to new yachts, and not refurbished yachts),16 and Mr. Bailey concluded that the price advantage of used yachts over new yachts was now insufficient for his yacht refurbishing activity to be profitable. He therefore abandoned his idea of refurbishing and reselling used yachts (and decided to use PBR as a vehicle to remanufacture and sell used airplanes, as is discussed below).17 Although running a yacht rental business had not ever been one of PBR's objectives, and although Mr. Bailey had no expertise in yacht rental, he decided to rent the Spellbound to help to cover the cost of its dockage fees until he sold it.