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course. After modification, the Diane was capable of sailing
under IOR, IMS, and PHRF.5
Effect of Luxury Tax on Industry
Another problem for petitioners occurred when the sailboat
racing industry slowed in the early 1990s because of the
imposition of the luxury tax under section 4002. During this
time, approximately 480,000 people lost jobs in the marine
industry; as a result, there were not as many races and fewer
people were chartering boats.
Tax Returns
In preparing their tax returns, petitioners consulted
Leonard Fruchter, a partner at a C.P.A. firm. Mr. Fruchter
concluded that petitioners had a profit motive after reviewing
petitioners’ efforts to find sponsors and to advertise,
petitioners’ ownership of other boats that were specifically used
for recreational purposes instead of the Diane, and petitioners’
maintenance of a journal for business expenses. For each of the
years in issue, on Schedule E, Income or Loss From Partnerships
and S Corporations, petitioners claimed deductions for the
flowthrough losses from Diane Racing.
5 Changes could have been made to make the boat more
attractive for chartering as an excursion boat (i.e., adding
amenities, raising the deck, altering the interior structure of
the boat), but they would have made the Diane incompatible for
racing.
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