T.C. Memo. 1996-68
UNITED STATES TAX COURT
CHARLES A. BALLARD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10333-94. Filed February 20, 1996.
B is an S corporation involved in the business of
yacht chartering. P, the sole shareholder of B,
claimed losses passed through from B. R disallowed P’s
losses on the ground that B’s activity was not engaged
in for profit.
1. Held: B’s yacht chartering activity was not
engaged in for profit within the meaning of sec. 183,
I.R.C.
2. Held, further, sec. 6653(a), I.R.C., addition
to tax is not sustained against P.
3. Held, further, sec. 6661, I.R.C., addition to
tax is sustained against P.
James S. Kaplan, for petitioner.
Moira L. Sullivan and Paul T. Muniz, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
HALPERN, Judge: By notice of deficiency dated March 17,
1994, respondent determined deficiencies and additions to tax
against petitioner as follows:
Additions to Tax
Sec. Sec. Sec.
Year Deficiency 6653(a)(1)(A) 6653(a)(1)(B) 6661
1
1986 $32,153 $1,608 ---
1
1987 53,585 2,679 $13,396
1
50 percent of interest due on deficiency amount.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
After concessions by the parties, the issues remaining for
decision are: (1) Whether petitioner may deduct losses incurred
by his wholly owned S corporation, Ballard Marine, Inc. (Ballard
Marine), in its operation of its yacht chartering business, or
whether such deductions are nondeductible because they were
incurred in an activity not engaged in for profit within the
meaning of section 183(a), and (2) whether petitioner is liable
for the additions to tax determined by respondent.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulations of fact filed by the parties and attached
exhibits are incorporated herein by this reference.
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At the time of filing the petition, petitioner resided in
Philadelphia, Pennsylvania.
Petitioner
During 1986 and 1987, petitioner was a managing director of
an investment banking firm (the firm). In August 1986, a major
portion of the firm was sold and, as a result thereof, petitioner
received in excess of $2 million.
Prior to the formation of Ballard Marine, discussed infra,
petitioner did not participate in boating for recreation. He had
no experience as a seaman or with the mechanical operation of
yachts, and he had very little personal experience in boating.
Prior to 1986, he was not a member of any yacht club.
Petitioner became interested in yacht chartering as a result
of his activities in arranging entertainment for clients and
others connected with the firm.
From late 1985 to the middle of 1986, petitioner visited
numerous boat shows. At those boat shows, vendors described
yacht investment plans.
Prior to forming Ballard Marine and causing it to purchase a
boat, petitioner did not prepare a formal business plan. He did
consider the economics of the yacht chartering business, as
follows: He planned to spend approximately $250,000 on a boat.
He believed that many operating costs (e.g., captain, crew, and
fuel) would be paid by the charterer. He assumed that charterers
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would be forthcoming and willing to pay a large enough daily
charter fee so that he would break even on his investment with
the boat being chartered only 3 to 5 days a month.
Petitioner made his Federal income tax returns for 1986 and
1987 on the basis of a calender year.
Ballard Marine
Ballard Marine, a Maine corporation, was organized on
September 2, 1986. The articles of incorporation of Ballard
Marine fail to state any purpose for which the corporation was
organized. Petitioner was the sole initial director of the
corporation. The initial officers of Ballard Marine were a
president and a treasurer. Petitioner was appointed to both
offices. Ballard Marine elected to be an S corporation within
the meaning of section 1361(a). Ballard Marine’s election to be
an S corporation was effective for its first taxable year.
Ballard Marine is a calender year taxpayer.
By contract dated October 17, 1986, Ballard Marine purchased
a 49-foot, MY MK III Gulfstar motor yacht (the yacht) for a total
contract price of $300,000. Ballard Marine also paid a Florida
sales tax of $15,000. Ballard Marine financed $175,000 of the
purchase price of the yacht with a bank loan. The yacht was
delivered to Ballard Marine on October 23, 1986, in Annapolis,
Maryland.
In connection with Ballard Marine’s purchase of the yacht,
Ballard Marine, or petitioner, consulted with legal counsel.
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Ballard Marine hired Walter Schintzius (Schintzius), a yacht
broker, for advice on, among other things, the operating
characteristics of the yacht, its acceptability as a charter
boat, and its residual value. Schintzius did not advise
petitioner on the day-to-day operations or economics of a yacht
chartering business.
Ballard Marine obtained insurance against various risks
associated with operating the yacht.
On January 26, 1987, the U.S. Coast Guard issued a
certificate of documentation with respect to the yacht, which
shows that the vessel was then documented for pleasure use.
Florida
In late October 1986, Ballard Marine hired Captain George
Newman (Newman), owner of Newman Marine Services (Newman Marine),
to move the yacht from Annapolis, Maryland, to the Lighthouse
Point Yacht Club (Lighthouse Point), Lighthouse Point, Florida.
In 1987, petitioner purchased land in Lighthouse Point,
Florida, on which he eventually built a house for his own use.
Ballard Marine also hired Newman to oversee both the
outfitting of the yacht and its maintenance and repair while it
was in Florida. Newman was not engaged in the charter business
in 1986 or 1987.
On December 3, 1986, Ballard Marine moved the yacht to the
Boca Raton Resort and Club, which is in southern Florida, and
which was the site of a meeting of the Securities Industry
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Association. Petitioner attended that meeting. A colleague of
petitioner’s from the firm had reserved the yacht for his use on
the evening of December 3, 1986. However, that individual
canceled the reservation.
While at the Boca Raton Resort and Club, the yacht was
visited by Betty Corson (Corson), a yacht charter agent whom
petitioner had known for some time and through whom petitioner
had chartered yachts in connection with his employment or his
work with the Securities Industries Association.
From December 1986 through April 1987, petitioner contacted
other charter agents and several individuals and informed them of
the availability of the yacht for charter. By memorandum dated
April 15, 1987, petitioner offered a 25-percent discount on
charters to certain colleagues at the firm. In April 1987,
Ballard Marine had printed 3,550 brochures describing the yacht
and stating that it was available for charter. Brochures were
sent to Corson and others.
Ballard Marine offered the yacht for bareboat charter.
Under that arrangement, the chartering party charters the boat
and independently contracts for a captain and crew. Sometimes
the chartering party will be qualified to operate the boat and
may not need a captain or crew. Effective May 1, 1987, the
bareboat charter rates for the yacht were as follows:
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Bareboat Charter Rates1
Chesapeake Bay Florida/Bahamas
2
Seven day week $3,000 $3,200
(7 days/6 nights)
Five day week2 2,500 2,750
(5 days/4 nights)
Weekends2 1,100 1,300
(2 days/1 night)
Day Rates3 600 700
½ Day3 400 450
Hourly3 175 200
1
Excludes cost of fuel, dockage, and stores.
2
Limited to a party of four.
3
Limited to a party of six.
Those rates were within 5 to 10 percent of the rates set by
Ballard Marine during the preceding 5 or 6 months that it held
the yacht out for charter, and those rates were not changed
during the remainder of time that Ballard Marine owned the yacht.
Petitioner was accorded a discount of 40 percent when he
chartered the yacht from Ballard Marine.
On May 13, 1987, an entity named Gulfcoast Farms chartered
the yacht for the stated rate of $3,200 a week for a 7-day trip
to Key West, Florida.
No other charters were made before the yacht was moved north
at the end of May 1987, except that petitioner used the yacht on
three occasions. Petitioner was expected to pay for his use of
the yacht. Petitioner did not pay for his 1987 use of the yacht
until sometime in 1988.
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Maryland
On May 24, 1987, Newman moved the yacht from Lighthouse
Point to Mears Great Oak Landing, which is in Maryland and on the
Chesapeake Bay. He returned the yacht to Lighthouse Point on
October 5, 1987.
Mears Great Oak Landing is 2-1/2-hours travel time, by car,
from petitioner’s home in Philadelphia.
Petitioner arranged with an individual, David Hart (Hart) to
maintain and keep up the yacht while it was at Mears Great Oak
Landing. Hart was to try and obtain charters. At Mears Great
Oak Landing there was a meeting center with approximately
30 rooms and a 9-hole golf course. The yacht was the only yacht
for charter at Mears Great Oak Landing. The meeting director at
Mears Great Oak Landing, and possibly other meeting center
personnel, also were asked to try and obtain charters.
Except for use made by petitioner of the yacht, there were
no charters of the yacht during the time it was at Mears Great
Oak Landing. Petitioner made substantial use of the yacht on
weekends. Petitioner paid for his use of the yacht in 1988.
Florida
After the yacht was returned to Florida in October 1987, no
use of it was made by anyone other than petitioner.
Trade-In of the Yacht and Termination of Charter Business
In January 1988, Ballard Marine disposed of the yacht in a
transaction whereby it acquired another boat, a 56-foot Hatteras
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flying bridge motor yacht (the second yacht). Ballard Marine
agreed to pay $530,000 for the second yacht, but was credited
with $300,000 as the trade-in value of the yacht.
Ballard Marine was not successful in chartering the second
yacht. Sometime in 1988, Ballard Marine terminated its charter
operations.
Books and Records; Ballard Marine’s Tax Returns
Petitioner kept records of Ballard Marine’s income and
expenses on a computer. Petitioner opened a bank account for
Ballard Marine. Ballard Marine obtained oil company credit cards
in its own name. It dealt in its own name with the power company
in Florida. It had its own stationery.
Ballard Marine made returns of income for 1986 and 1987 on
Forms 1120S, U.S. Income Tax Return for an S Corporation. On
those forms, Ballard Marine reported the following items of
income and deduction:
1986 1987
Gross income $ 0 $13,982
Deductions:
Interest 2,439 16,175
Depreciation 54,806 80,383
Insurance 3,465 3,210
Legal fees 307 ---
Consulting
fees 5,170 ---
Transport
crew/fuel 5,171 18,267
Mooring/
docking 2,281 8,001
Miscellaneous 50 2,865
Telephone &
utilities --- 1,084
Repairs and
maintenance --- 10,251
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Advertising and
promotion --- 4,435
Professional fees --- 3,422
Income (loss) ($73,689) ($134,111)
Barry M. Strauss (Strauss), the managing principal of
Barry M. Strauss Associates, Ltd. (Associates), is a tax attorney
and C.P.A. specializing in advising investment bankers in
accounting, tax, and financial matters. Ballard Marine’s Federal
income tax returns for 1986 and 1987 were prepared by an employee
of Associates.
Petitioner’s Tax Returns
Petitioner made returns of income for 1986 and 1987 on
Forms 1040, U.S. Individual Income Tax Return. On those forms,
petitioner reported losses from Ballard Marine in the amounts of
$73,689 and $134,111, respectively.
Petitioner’s Federal income tax returns for 1986 and 1987
were prepared by an employee of Associates.
Strauss had come to represent petitioner in 1984, when the
firm retained Associates to either prepare or review the tax
returns of managing directors to assure that all tax matters were
properly reported by them. Associates was so retained in order
to avoid having the firm embarrassed either by the Securities and
Exchange Commission or the general media on account of the tax
problems of managing directors.
Not an Activity Engaged In for Profit
Ballard Marine’s activity of holding the yacht for charter
was not an activity engaged in for profit.
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Negligence; Substantial Understatement
No portions of petitioner’s underpayments for 1986 and 1987
were due to negligence.
The principal purpose of Ballard Marine was not tax
avoidance.
OPINION
I. Introduction
Under section 1366, a shareholder in an S corporation is
entitled to take into account his or her pro rata share of the
corporation’s losses. See sec. 1366(a). Ballard Marine was an S
corporation for 1986 and 1987, and we must determine the extent
of Ballard Marine’s allowable losses for those years.
Respondent’s explanation for her adjustments with respect to
those losses is that they were incurred in an activity not
entered into for profit. Respondent has also determined
additions to tax as set forth above.
II. Deficiencies
A. Section 183--For-Profit Requirement
Section 183(a) provides:
In the case of an activity engaged in by an individual
or an S corporation, if such activity is not engaged in
for profit, no deduction attributable to such activity
shall be allowed under this chapter except as provided
in this section.
Section 183(c) provides:
For purposes of this section, the term “activity not
engaged in for profit” means any activity other than
one with respect to which deductions are allowable for
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the taxable year under section 162 or under paragraph
(1) or (2) of section 212.
The question we must decide is whether Ballard Marine’s
activity with regard to holding the yacht for charter (the
charter activity) constituted an activity “not engaged in for
profit”.
B. Actual and Honest Profit Objective
An activity is engaged in for profit if the taxpayer has an
“actual and honest objective of making a profit.” Keanini v.
Commissioner, 94 T.C. 41, 46 (1990). “Although the section 183
analysis with respect to the activities of a subchapter S
corporation is applied at the corporate level, section 1.183-
1(f), Income Tax Regs., * * * [a taxpayer’s] intent is
attributable to his wholly owned subchapter S corporation.”
Sousa v. Commissioner, T.C. Memo. 1989-581. Moreover, although
the expectation of profit need not be reasonable, it must be
shown that a bona fide profit objective did exist. Golanty v.
Commissioner, 72 T.C. 411, 425-426 (1979), affd. without
published opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(a),
Income Tax Regs. Profit in this context means economic profit,
independent of tax savings. Hulter v. Commissioner, 91 T.C. 371,
393 (1988). Whether Ballard Marine engaged in the charter
activity with the requisite profit objective is a question of
fact to be determined from all the facts and circumstances;
petitioner bears the burden of proof. Rule 142(a); Keanini v.
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Commissioner, supra at 46; Golanty v. Commissioner, supra at 426;
sec. 1.183-2(a), Income Tax Regs.
Section 1.183-2(b), Income Tax Regs., provides a
nonexclusive list of factors to be considered in determining
whether an activity is engaged in for profit. No single factor
is determinative. Keanini v. Commissioner, supra at 47; Taube v.
Commissioner, 88 T.C. 464, 479-480 (1987); sec. 1.183-2(b),
Income Tax Regs.
Taking into account the factors set forth in section 1.183-
2(b), Income Tax Regs., and based on the record as a whole, we
conclude that the charter activity was not an activity entered
into for profit, and we have so found.
C. Petitioner Had No Objective To Make a Profit
The regulations provide that “Although a reasonable
expectation of profit is not required, the facts and
circumstances must indicate that the taxpayer entered into the
activity * * * with the objective of making a profit.” Sec.
1.183-2(a), Income Tax Regs.
We conclude that, although petitioner certainly would have
liked Ballard Marine to make a profit, that was not his objective
in organizing and operating Ballard Marine.
In determining petitioner’s objective in organizing and
operating Ballard Marine, we have the benefit of neither a
statement of corporate purpose (in Ballard Marine’s articles of
incorporation) nor a formal business plan. Nevertheless,
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petitioner has made clear his business plan: Buy an asset (a
yacht) that he hoped would retain its value and lease (charter)
it out for short periods at rates that will quickly return the
capital cost of the asset. Indeed, petitioner proposes that we
find as facts the following:
Petitioner was an expert at the Firm in designing
investment programs for the short-term utilization of
capital assets at lease rates equal to a high
percentage of their initial cost. * * *
Petitioner noted significant similarities between the
yacht charter business and these programs in that they
both involved assets that retain a high percentage of
their initial value, a benefit accruing to the asset’s
owner.
Petitioner also proposes that we find:
Petitioner believed that he would have an advantage in
obtaining yacht charters because of his contacts with
firms in the securities industry, which he knew from
his own direct experience were potential frequent users
of yacht charters.
Respondent has made various objections to those proposed
findings, and we have not made findings of fact in accordance
with those proposed findings. The parties have stipulated,
however, and we have found, that petitioner had no experience as
a seaman or with the mechanical operation of yachts, and he had
very little personal experience in boating.
Numerous factors lead us to conclude that petitioner had no
objective to make a profit. Petitioner testified that he had
calculated the amount of revenue he needed “to break even”. He
did not testify, however, that he or anyone else determined how
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realistic it was to expect Ballard Marine to earn such revenue.
Ballard Marine hired Schintzius, a yacht broker, who advised on
the operating characteristics of the yacht, its acceptability as
a charter boat, and its residual value. Schintzius, however, did
not advise petitioner on the day-to-day operations or economics
of a yacht chartering business. Before organizing Ballard
Marine, from late 1985 to 1986, petitioner visited numerous boat
shows. At those boat shows, vendors described yacht investment
plans. We do not doubt that, before forming Ballard Marine,
petitioner considered that he might reduce, or even recoup, his
cost in purchasing a yacht by holding it out for charter. He
knew that there was at least some market for yacht charters.
Indeed, he had arranged entertainment for clients of the firm on
chartered yachts. We are unconvinced, however, that petitioner’s
objective in causing Ballard Marine to purchase and operate the
yacht was to earn a profit. Did petitioner contemplate the
possibility of earning a profit? Yes, we believe that he did, at
least in the sense that a profit was possible if (and that is a
big if) the value of the yacht would decrease at a rate lower
than the rate at which its cost could be recouped out of charter
revenues. Although petitioner may have been an expert in certain
aspects of commercial transactions that accomplished just that,
the insight at the core of both those commercial transactions and
petitioner’s hopes with regard to the yacht seems to us quite
commonplace. We do not equate an objective to make a profit with
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the realization (even coupled with the willingness to act on that
realization) that, if sufficient revenues could be produced, a
profit could be earned. Indeed, petitioner has failed to show us
that substantial charter revenue was realistic for Ballard
Marine.
Certain trappings of a profit objective are here: Ballard
Marine was formed as a business corporation; it had advisers; it
kept certain records of its income and expenses; it did offer the
yacht out for charter; it did produce advertising brochures; and
it did deal with petitioner as an outsider (although at a
40-percent discount). Those trappings, however, are insufficient
to convince us of petitioner’s objective to earn a profit.
Petitioner was the sole shareholder of Ballard Marine, so that
Ballard Marine’s policy of charging him for his use of the yacht
makes little sense except as a for-profit trapping, for tax
purposes. Indeed, although petitioner claims on brief that his
out-of-pocket costs were “far in excess of any tax benefits”, he
has failed to detail for us the facts that would prove that
conclusion. Clearly, Ballard Marine was unsuccessful in the
charter business. Nevertheless, petitioner did not consider a
general reduction in prices to try and attract more business.
Finally, we are influenced by the fact that petitioner did
make personal use of the yacht. He used it on weekends, when he
was free from work. In the winter, he kept it in Florida, at
Lighthouse Point, where, in 1987, he purchased land to build a
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house. In the summer, he kept it on the Chesapeake Bay, which is
only 2-1/2 hours from his home in Philadelphia. The tax cost of
paying Ballard Marine for his personal use seems to us a small
cost for petitioner to have paid if it would have helped him
establish the bona fides of a profit objective. We need not
determine what petitioner’s objective was in acquiring the yacht
(to resolve this case, it is sufficient that we determine only
whether it was to earn a profit). Nevertheless, we believe that
petitioner’s objective in acquiring the yacht was to have it
available for his personal use. As we have said, we believe that
petitioner would have liked to make a profit with the yacht.
Nevertheless, we do not believe that that was his objective in
causing Ballard Marine to acquire and operate the yacht. Cf.
Antonides v. Commissioner, 91 T.C. 686, 697 (1988), affd. 893
F.2d 656 (4th Cir. 1990) (“Chartering a yacht to others in order
to afford to keep it through tax savings for one’s personal
enjoyment is not the same as having a profit objective.”).
D. Conclusion
Ballard Marine’s activity of holding the yacht for charter
was not an activity engaged in for profit within the meaning of
section 183(c). Accordingly, Ballard Marine’s expenses
attributable to that activity are allowable as deductions only to
the extent provided for in section 183(b).
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III. Additions to Tax
A. Negligence
Respondent has determined additions to tax under section
6653(a)(1)(A) and (B) for both 1986 and 1987. Section
6653(a)(1)(A) imposes an addition to tax equal to 5 percent of
the entire underpayment if any portion of such underpayment is
due to negligence. Section 6653(a)(1)(B) imposes an addition to
tax equal to 50 percent of the interest payable under section
6601 with respect to the portion of the underpayment due to
negligence. Negligence is lack of due care or failure to do what
a reasonable and ordinarily prudent person would do under the
circumstances. E.g., Neely v. Commissioner, 85 T.C. 934, 947
(1985).
Petitioner was unable to carry his burden of proving that
Ballard Marine had the objective of making a profit. However,
the mere fact that petitioner’s proof was inadequate does not
require us to find that the underpayment with respect to the
charter activity was due to negligence. In another recent yacht
case, we found no negligence based in part on the passive role of
the taxpayer in the decision to engage in the charter activity.
Antonides v. Commissioner, supra at 700. Petitioner’s role here
certainly was not passive. Nevertheless, we find another
mitigating circumstance. Both Ballard Marine’s and petitioner’s
returns were prepared by an employee of Barry M. Strauss
Associates, Ltd. (Associates). Associates had been retained by
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the firm to assure that tax returns of managing directors
contained matters properly reported. Barry M. Strauss testified,
and we are satisfied, that Associates’ personnel were qualified
as tax experts, reviewed petitioner’s returns, were aware of
Ballard Marine’s activities, and advised petitioner that his
reporting positions were proper.1 Petitioner can rely on such
advice to avoid an addition to tax for negligence. See, e.g.,
Horn v. Commissioner, 90 T.C. 908, 942 (1988); Conlorez Corp. v.
Commissioner, 51 T.C. 467, 475 (1968). Accordingly, we have
found that petitioner was not negligent, and we sustain no
addition to tax for negligence.
B. Substantial Understatement of Liability
Respondent has determined an addition to tax under section
6661 for 1987. Section 6661(a) provides for an addition to the
tax for any year for which there is a substantial understatement
of income tax. A substantial understatement is defined as an
understatement which exceeds the greater of 10 percent of the tax
required to be shown on the return for the year or $5,000. Sec.
6661(b)(1)(A). The amount of the addition to tax is 25 percent
of the underpayment attributable to a substantial understatement.
Pallottini v. Commissioner, 90 T.C. 498 (1988). The amount of
the understatement, however, is reduced by amounts attributable
1
That extends to certain adjustments relating to itemized
deductions that were the subject of the second stipulation of
facts and that were conceded by petitioner.
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to items for which (1) there existed substantial authority for
the taxpayer's position, or (2) the taxpayer disclosed relevant
facts concerning the items with his tax return. Sec.
6661(b)(2)(B).
If, however, the understatement is attributable to a tax
shelter, disclosure of the item will not enable the taxpayer to
avoid the addition, and the substantial authority test will not
apply unless the taxpayer can show that he reasonably believed
the treatment causing the understatement was more likely than not
proper. Sec. 6661(b)(2)(C)(i). The term "tax shelter" includes
an "entity [such as an S corporation] * * * if the principal
purpose of such * * * entity * * * is the avoidance or evasion of
Federal income tax." Sec. 6661(b)(2)(C)(ii). Section 1.6661-
5(b)(iii), Income Tax Regs., interprets the term "tax shelter" as
follows:
The principal purpose of an entity * * * is the
avoidance or evasion of Federal income tax if that
purpose exceeds any other purpose. * * *
We do not believe that the principal purpose of Ballard
Marine was the avoidance of Federal tax, and we have so found.
No doubt Ballard Marine facilitated petitioner’s tax claim of a
profit objective by, among other things, providing him with a way
to pay for his own use of the yacht. Nevertheless, we are
convinced that petitioner had purposes for forming Ballard
Marine, such as limiting his liability, whose importance to him
exceeded any tax avoidance purpose. Petitioner’s understatement
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is not attributable to a tax shelter within the meaning of
section 6661(b)(2)(C)(ii).
Petitioner does not claim that adequate disclosure for
purposes of section 6661 was made on his or Ballard Marine’s
return, and, consequently, we do not address that issue.
Petitioner does claim that substantial authority supports
his position with regard to the losses from Ballard Marine
disallowed under section 183 (the section 183 losses). We must
decide whether petitioner’s deduction of the section 183 losses
is supported by substantial authority. In evaluating whether a
taxpayer’s position regarding treatment of a particular item is
supported by substantial authority, the weight of authorities in
support of the taxpayer’s position must be substantial in
relation to the weight of authorities supporting contrary
positions. Sec. 1.6661-3(b)(1), Income Tax Regs. An authority
that is materially distinguishable on its facts generally will
have little or no relevance in determining whether substantial
authority supports the tax treatment at issue. Antonides v.
Commissioner, 91 T.C. at 702-704; sec. 1.6661-3(b), Income Tax
Regs. Petitioner sets forth five cases as substantial authority:
Feldman v. Commissioner, T.C. Memo. 1988-126; Slawek v.
Commissioner, T.C. Memo. 1987-438; Zwicky v. Commissioner, T.C.
Memo. 1984-471; Dickson v. Commissioner, T.C. Memo. 1983-723;
McLarney v. Commissioner, T.C. Memo. 1982-461. All of those
cases involve a boat chartering activity and our decision that
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the taxpayer entered into the activity for profit. For the most
part, we find those cases to involve facts that are materially
distinguishable from the facts at hand. In Feldman v
Commissioner, supra, the taxpayer purchased a boat with a proven
charter record and an established clientele; the taxpayer made no
personal use of the boat; he negotiated a favorable management
agreement, with a guaranteed minimum level of revenue. In
Dickson v. Commissioner, supra, the taxpayer leased the boat to a
charter agency for guaranteed annual payments and made limited
personal use of the boat. In McLarney v. Commissioner, supra,
the taxpayer regularly spent a substantial amount of time and
energy running the business; the taxpayer changed the mode of
operation to increase profitability; his personal use of the boat
was small in comparison to the number of charters. In Zwicky v.
Commissioner, supra, the taxpayer devoted substantial amounts of
time to the charter operation; the taxpayer engaged in numerous
promotional activities to gain charters; the taxpayer made
minimal recreational use of the boat. Slawek v. Commissioner,
supra, most closely resembles the case at hand in that there we
found that (1) the taxpayers made no real investigation of the
charter boat business before undertaking their charter activity,
and (2) they made no projections of income and expenses as a
basis for estimating whether or not the activity could be
profitable. We also found, however, that they advertised in a
national newspaper, the Wall Street Journal, and that they made
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no significant use of the boat for personal purposes. Even
granting that Slawek is relevant, we do not find that there is
substantial authority supporting petitioner’s position. The
following cases are an example of cases involving facts similar
to those at hand, but in which the Court found no profit
objective: Ward v. Commissioner, T.C. Memo. 1987-215; Blake v.
Commissioner, T.C. Memo. 1981-579, affd. 697 F.2d 473 (2d Cir.
1982); Lyon v. Commissioner, T.C. Memo. 1977-239. We find that
the authority supporting petitioner’s deduction of the section
183 losses is insubstantial.
Petitioner has made no argument with respect to adequate
disclosure or substantial authority in connection with those
adjustments that petitioner has conceded. We thus conclude that
petitioner concedes that section 6661(b)(2)(B) is inapplicable to
those adjustments, and we so find. Accordingly, we sustain
respondent’s determination of an addition to tax under section
6661 except to the extent necessary to take account of
concessions made by respondent.
Decision will be entered
under Rule 155.