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follows:
Year Gross Income Total Expenses Net Loss
1999 $36,273 $41,866 $5,593
2000 40,863 54,049 13,186
Expenses consisted of advertising, automobile expenses,
commissions and fees, depreciation, insurance, mortgage, legal
and professional services, repairs and maintenance, taxes and
licenses, meals and entertainment, utilities, and other expenses.
In response to an audit for the years in issue, petitioners
created on June 18, 2002, activity logs based on their
contemporaneous work logs, receipts, photos, checkbook, and
statements. These activity logs itemized the type of work
petitioners allegedly performed in their sailboat charter
business as follows:
Year Total Hours Labor Hours[1]Travel Time Investment Time
1999 591.25 390.75 178 22.5
2000 616.38 406.5 178.38 31.5
[1]We note that many of the activity items are improperly categorized as
labor hours. For instance, attending AYC meetings and barbecues are not labor
services.
In the notice of deficiency, respondent disallowed
petitioners’ business losses. Respondent determined that
petitioners’ sailboat charter business is a rental activity, and
that petitioners’ business losses therefore constitute passive
activity losses.
Petitioners timely filed a petition with the Court disputing
the determined deficiencies. Paragraph 4 of the petition states
in part as follows:
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