Case Note: Weller v. Commissioner of Internal Revenue

This brief case note describes one of the recent cases of the U.S. tax court.  This description is not a legal advice and may not be relied upon as such.

On September 20, 2011, the tax court ruled in favor of the taxpayer and found that he engaged in his business activities for profit (see Weller v. Comm’r, T.C.M. 2011-224 (T.C. 09/20/11)).

The main issue in this case was whether the taxpayer engaged in his glider plane-related activities during the years in issue with the objective of making a profit within the meaning of section 183.  After being laid off from Boeing in 2002, the taxpayer decided to start a business where he would off high-performance glider training.  On August 1, 2003, petitioner formed Northwest Eagle Soaring, L.L.C. (“Northwest”), in Washington. Northwest provides private glider flight instruction and glider plane rides. The taxpayer did not prepare a business plan for Northwest.

The taxpayer is licensed by the Federal Aviation Administration (FAA) as a Certified Flight Instructor Airplane, Certified Flight Instructor Instruments, and Certified Flight Instructor Glider. Petitioner performed flight instruction for the Boeing Employees Soaring Club.

In late 2003, the taxpayer used money he inherited to complete his purchase of a DG-1000 high-performance glider plane for $180,000, and he placed it in service on November 22, 2003. Northwest conducts its activities primarily on weekends from March through November. Glider flights are restricted to times of good visibility. For business promotion, Northwest maintains a Web site, distributes marketing flyers to locations such as airports and aviation-related businesses, and advertises in a flying publication. The taxpayer  maintained flight logs for the glider activities as required by the FAA.

In 2004, the taxpayer focused his time on the Northwest activities and did not have other employment.  For the years 2005-2007, he worked for other companies, but still deducted unreimbursed employee expenses related to Northwest.

The IRS audited the tax returns for the years 2005-2007 and found that the taxpayer did not have a profit-making objective (i.e. that his Northwest activities were just a hobby).

The tax court disagreed. After finding that the taxpayer’s subjective intent to make profit is the focus of the test, the court looked in detail at the factors provided by the IRS regulations to determine such intent (Section 1.183-2(b)).   There were nine relevant factors: (1) The manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that the assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other activities for profit; (6) the taxpayer’s history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, that are earned from the activity; (8) the financial status of the taxpayer; and (9) whether elements of personal pleasure or recreation are involved in the activity.

Upon careful application of the facts to these nine factors, the court found that the taxpayer engaged in the glider activities with the primary purpose and intent of realizing an economic profit independent of tax savings during the years in issue.

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