You might be able to deduct the depreciation and get a tax loss, but you must have credentials and show you tried. That’s the takeaway on William L. Weller, 2011 T.C. Mem. 224, filed 9/20/11.
Bill was a Boeing build-up mechanic until he got laid off. Using inherited money, he bought a high-priced glider. He’d formerly instructed with the Boeing Employees Soaring Club, and held the FAA Certified Flight Instructor Airplane, Certified Flight Instructor Instruments, and Certified Flight Instructor Glider qualifications.
While grounded from Boeing, Bill set up a disregarded LLC and started a flying school. He kept the FAA mandated flying logs but no other books and records. He did advertise on the Web and in flying publications, handed out leaflets at flying locations, and worked week-ends during good weather (Bill was based in Washington State). Even when he got another job with a homebuilder, and after he got rehired by Boeing, he kept ‘em flying on weekends, but made no profit once he depreciated the glider. He also flew under the FAA 100-hour radar, which would have required more extensive inspections of his aircraft.
IRS claimed the flying school was a hobby. Flying is fun, Bill never kept business books and records, consulted with experts or formulated a business plan.
Judge Cohen finds for Flyin’ Bill. True, he didn’t have a business plan or business books and records, and he did fly under the 100-hour radar. But he did advertise, he cut out insurance for his glider when business didn’t justify the expense, and his efforts to attract pupils were more than sporadic. It’s true Bill has all the necessary FAA paperwork and did teach flying at the Boeing employees club, so maybe that counterweighs the facts that Bill never spoke to lawyers, accountants or business advisers about how to make money.
True, flying is fun, and Bill flew most weekends in good weather. But full-time employment is not required to show a profit motive, one can have more than one trade or business, and no one is required to prove suffering to show a profit motive.
There’s no evidence that any income was expected from asset appreciation (Bill never claimed his glider would get more valuable), nor had Bill ever conducted a similar business before.
Bill claimed that, without the paper depreciation write-off, he would have made money, but Judge Cohen says you cannot ignore depreciation in figuring profit.
Bill did have full-time employment with the homebuilder after the first year he ran the flying school, and then was rehired by Boeing in his old job title. Said Judge Cohen: “While substantial income from sources other than the activity may indicate that the activity is not engaged in for profit, a taxpayer’s lack of substantial income from sources other than the activity tends to indicate that an activity is engaged in for profit. Sec. 1.183-2(b)(8), Income Tax Regs. The legislative history of the Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 487, discloses a particular concern about wealthy individuals attempting to generate paper losses for the purpose of sheltering unrelated income. See H. Rept. 91-413 (1969), 1969-3 C.B. 200, 244-245. We have no such concerns with respect to petitioner.” 2011 T.C. Mem. 224, at p. 13. Bill was no high-flying millionaire.
Finally, IRS did not contest that most of Bill’s flying hours were spent instructing students for pay, or for mandatory continuing FAA qualification.
Bill ultimately comes a cropper on unreimbursed business expenses, but those are unrelated to his flying business, and it’s the usual indocumentado story, no substantiation.
So there’s a Rule 155 computation on those, with penalties if Bill flunks the five-and-ten rule (greater of $5000 or 10% of tax required to be shown). But Bill’s flying business is a business.