T.C. Memo. 1998-156
UNITED STATES TAX COURT
THOMAS C. OBERLE AND MARGARET COLBERT OBERLE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5390-97. Filed April 30, 1998.
Kirk A. Pinkerton and Stuart J. Friedman, for petitioners.
Lauren Gore, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: Respondent determined deficiencies in
petitioners' Federal income taxes of $8,532.67 for 1993 and
$14,038 for 1994. 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.
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The issue for decision is whether petitioners are entitled to
deduct losses attributable to their yacht chartering activity.
We hold that they are not so entitled.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. At
the time petitioners filed their petition, they resided in
Beverly Shores, Indiana.
During the years in issue, Mr. Oberle was a stockbroker for
Dean Witter Reynolds, Inc., and Ms. Oberle was a real estate
broker for Price Realtors, Inc. On or about September 11, 1993,
petitioners purchased a 38-foot yacht for $143,000, entered into
a 7-year Charter Brokerage Agreement (agreement) with Michigan
City Sailboat Charters, Inc. (broker), and docked the yacht in
one of the broker's slips at Michigan City, Indiana.
The agreement provides that the broker is responsible for
the following duties: (1) Showing the yacht to prospective
charterers; (2) signing any and all documents pertaining to the
charter of the yacht; (3) collecting fees from charterers; (4)
making mechanical repairs of items damaged during a charter; (5)
meeting the charterers at the yacht; (5) reviewing yacht
equipment and operations; (6) taking charterers on orientation
cruises; (7) cleaning the yacht on completion of the charter; and
(8) taking all necessary steps to charter the yacht. In exchange
for these services, the broker received a commission of 50
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percent of charter revenues. The agreement further provides that
petitioners (1) are required to maintain the yacht in good
condition and (2) have the right to operate the yacht for
personal use, provided such use does not conflict with the
yacht's charters.
At the end of October 1993, petitioners removed the yacht
from the water and placed it in storage for the winter at Benton
Harbor, Michigan. From September 11 through December 20, 1993,
petitioners worked on the yacht for a total of approximately 53
hours. Most of this time was spent traveling to the storage
facility where they cleaned and winterized the yacht. The yacht
was not chartered in 1993.
On April 23, 1994, petitioners sailed the yacht to Michigan
City. During 1994, the yacht was chartered 45 days, and
petitioners received gross receipts of $5,152. Petitioners
occasionally used the yacht for personal enjoyment. On October
22, 1994, petitioners removed the yacht from the water and placed
it in storage for the winter. During 1994, petitioners worked on
the yacht for a total of 194 hours, but only 89 hours of such
work was performed while the yacht was docked at Michigan City.
Petitioners spent most of this time performing routine
inspections and maintenance of the yacht. From 1993 through 1996
petitioners did not make a profit from their chartering activity.
On their returns, petitioners claimed net losses of $21,858 for
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1993 and $35,830 for 1994 relating to their chartering activity.
Respondent disallowed the claimed deductions because petitioners
were not engaged in the activity for profit and did not
materially participate in the activity.
OPINION
Even if petitioners carried on their chartering activity for
profit, their deductions for this activity shall not be allowed
because they did not materially participate in such activity.
Section 469 disallows the deduction of net losses from any
activity in which the taxpayer does not materially participate.
Sec. 469(c). An individual materially participates in an
activity when involved in the operations of the activity on a
regular, continuous, and substantial basis. Sec. 469(h)(1).
Temporary regulations provide, in relevant part, that an
individual shall be treated as materially participating if the
individual meets any of the following tests:
(2) The individual's participation in the activity
for the taxable year constitutes substantially all of
the participation in such activity of all individuals
(including individuals who are not owners of interests
in the activity) for such year;
(3) The individual participates in the activity for
more than 100 hours during the taxable year, and such
individual's participation in the activity * * * is not less
than the participation * * * of any other individual
(including individuals who are not owners of interests in
the activity) for such year;
* * * * * * *
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(7) Based on all of the facts and circumstances
* * *, the individual participates in the activity on a
regular, continuous, and substantial basis during such
year. [Sec. 1.469-5T(a)(2), (3), and (7), Temporary
Income Tax Regs., 53 Fed. Reg. 5725-5726 (Feb. 25
1988)].
To meet the material participation test under paragraph (a)(7),
an individual must participate in the activity for more than 100
hours. Sec. 1.469-5T(b)(2)(iii), Temporary Income Tax Regs., 53
Fed. Reg. 5726 (Feb. 25, 1988).
Petitioners have failed to establish that they materially
participated in the charter activity. Petitioners entered into
an agreement with the broker that gave the broker all day-to-day
management responsibilities, including taking all necessary steps
to charter the yacht. Petitioners failed to devote 100 hours to
their activity in 1993 and while petitioners devoted 194 hours to
their activity in 1994, only 84 of such hours relate to the
period when the yacht was available for charters. Assuming
arguendo that petitioners did devote more than 100 hours to their
activity in 1994, they have not established that such
participation was greater than the broker's participation. In
essence, petitioners' participation was limited to routine
maintenance of the yacht and was not substantial. Therefore, we
conclude that petitioners did not materially participate in their
chartering activity. Cf. Chapin v. Commissioner, T.C. Memo.
1996-56; Goshorn v. Commissioner, T.C. Memo. 1993-578.
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Accordingly, we hold that they are not entitled to the claimed
deductions.
All other contentions raised by the parties are either
irrelevant or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.