In Uncategorized on 10/15/2012 at 17:35

But Not If You Want the Gulf Opportunity Zone Deduction

That’s Judge Vasquez’s lesson to Brien C. Blakeney and Pamela A. Hall, 2012 T. C. Memo. 289, filed 10/15/12. It’s the saga of the bad ship Shockwave, a 62-foot Viking Convertible Yacht.  Brien bought her for his charter fishing company that operated out of Orange Beach, AL, smack-dab in middle of the Gulf Opportunity Zone, because it was smack-dab in the middle of Hurricane Katrina of infamous memory.

Shockwave was exactly that. Brien and his trusty master Captain Enos took delivery of this masterpiece of marine artistry in Florida, outside the Gulf Zone, to take it on a shakedown cruise prior to moving it to Orange Beach. However, it took nearly a year to get from Florida to Port Orange. The electrics fried routinely; seawater infiltrated the fuel tanks; something or someone stove a hole in her side as she lay at anchor under repair; the refrigeration equipment went on the fritz, frying the computer. Finally poor Captain Enos died, and Captain Stine, a hardy mariner, at last conned this latter-day Flying Dutchman into Port Orange.

Notwithstanding the foregoing, as the high-priced lawyers say, and even though ol’ Shockwave could barely make five knots with a following sea or go more than a mile or two offshore without imperiling passengers and crew before finally being repaired, the fish-filled waters of the Caribbean adjoining Florida permitted Brien to charter her for 43 days in those out-of-Zone waters (and get some personal use out of her along those lines), before ol’ Shockwave limped wearily into Port Orange, where she remained available for charter for some 74 days, but the fishing season had closed and nobody wanted to charter her.

Brien claims the 50% of purchase price bonus depreciation under Section 1400(N), Congress’ largesse to the battered businessfolk of the Gulf Coast. If you buy, place in service, and use business property in a trade or business substantially all of which is conducted in the Zone, the bonus is yours.

Brien claims that the use outside the Zone wasn’t use in business at all, as poor ol’ Shockwave couldn’t be used until finally fixed.

IRS claims “that under Notice 2006-77, 2006-2 C.B. 590, ‘substantially all’ of the Shockwave’s use was not in the GO Zone. Notice 2006-77, supra, provides that for the purposes of section 1400N(d)(2)(A)(ii) “substantially all” means 80% or more. Id. sec. 3.01, 2006-2 C.B. at 590.” 2012 T. C. Memo. 289, at p. 15.

No, says Judge Vasquez, IRS Notices do not have the force of law nor are they entitled to Chevron deference. See my blogpost “Carpenter, Colony, Chevron and Mayo”, 4/26/11. While Notices might be deferred to under Skidmore v. Swift & Co, 323 U. S. 134 (1944), we don’t need to go there. 43 days of charter in the Caribbean is 37% of the total of 117 days (74 in the Zone and 43 days out of Zone). That is substantial non-Zone use.

So Brien’s deduction sinks.

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