The case
starts with:
Edward G Kurdziel is the only man in America licensed to fly a Fairey Firefly. He is also the only man in America who has a Firefly to fly.”
I was
immediately hooked.
What is a Fairey
Firefly?
The Firefly entered service as a carrier-based fighter for the Royal Navy toward the end of the war (WW II - CTG), and became a specialist in antishipping and antisubmarine warfare.”
Mr Kurdziel –
also known as Captain Eddie – explained that the Firefly “was the first British
airplane to fly over Japan and Tokyo in 1945 during the [occupation] of Japan.”
In the fall
of 1993 Captain Eddie learned that a Firefly was for sale in Australia. He travelled;
he consulted with mechanics. The plane had not flown in years, possibly
decades.
He borrowed
against his house and bought the plane for $200,000. It cost another $60,000 to
have it shipped.
The plane is
a near-museum piece. What was he going to do with it?
His early
plan was to sell rides on the plane. He looked into insurance (can you imagine?).
He collaborated with the Royal Australian Navy on a plan to restore the plane.
That took
eight years, 45,000 man-hours and as many as 10 full-time workers.
Captain
Eddie was a bit of an Anakin Skywalker, designing and crafting many replacement
parts himself.
In 2002 he
received an “air worthiness certificate” from the FAA. He also got the FAA to
license him to fly it. To this day, he is the only person in the country with such
a license.
He showed
the plane. It won prizes. It landed on 20 or 30 magazine covers.
This being a
tax blog, there has to be a tax angle. What you think it was?
Yep, Captain
Eddie deducted everything.
Problem: to
pull this off, Captain Eddie had to persuade the IRS – and then the Court – that
he actually had a business. As opposed to … say … a hobby. A really cool hobby,
but a hobby nonetheless. A business has to have the intent – perhaps misplaced
but nonetheless sincere – that it will show a profit.
How was this
old warbird going to show a profit after the near-herculean effort and cost of
restoring it?
Rides? Nah,
that was nixed immediately by the authorities. No surprise that the FAA was not
too keen with public rides on an antique, near-unflyable-by-today’s-standards airplane.
There were
airshow appearances and prizes.
Yes, but the
winnings were a pittance against what he spent. No chance of a profit there.
The Firefly
crashed in 2012. Captain Eddie is still working on its repair.
The IRS brought
out its hobby loss hammer and said “no deduction here.”
Off to Court
they went.
Captain
Eddie had to show that a sane businessperson would keep putting money into a
money pit. Granted, one may do it for love, for respect for history or other
reasons, but those reasons are not business reasons.
But it can
happen. Take thoroughbred horses, for example. The odds of winning the Derby
are miniscule, but the payoff is so great – especially if one can win the
Triple Crown – that the activity can still make business sense.
Captain
Eddie had an ace in his hand: he could sell the plane for a profit.
Mind you,
there are a number of factors the Court could consider, such as:
· Manner in which the activity is conducted
· Expertise of taxpayer or advisors
· Time and effort expended by taxpayer
· Success on carrying on other similar activities
· History of income or loss
· Amount of occasional profits, if any
· Taxpayer’s financial status
· Elements of personal pleasure or recreation
· Expectation that assets used in activity will increase in value
Captain Eddie
won and lost some of these. For example, he received retirement pay pushing $180K
from the Navy and Delta. He could afford an expensive hobby. There was no
question about the pleasure he derived from the Firefly. He had a real estate
business, but that it was a stretch to argue that it was “similar” to the
Firefly.
At trial,
Captain Eddie brought in experts who testified the plane was worth between $3.5
and $8 million. That would cover the approximately $1.9 million Captain Eddie
had put into it.
The IRS
quickly pointed out the plane crashed and had not flown since.
But planes
can be repaired….
The Court acknowledged
that Captain Eddie could have made money by selling the plane, but then it
wondered why he did not sell it years before, when it was winning all those
awards. That would likely have been its peak price.
The Court considered
all the pieces.
- Initially Captain Eddie had thought of selling rides. The Court was unimpressed. A moment’s research would have told him there was no chance the FAA would allow this.
- A businessperson would respond by revising the business plan. The Court was looking at things titled “Original Plan 1999-2000?,” which did not increase its confidence that Captain Eddie had landed on his feet.
- He had listed the activity on his personal tax return as “airplane leasing,” The Court was not humored, as nothing had ever been leased.
- He filed a local property tax exemption for the Firefly, stating that he was not using it for commercial purposes or holding it for sale.
- Oh oh
- If he had thought of selling the plane, he waited a long time – 2014 – before obtaining an appraisal. The Firefly was rocking it in the early aughts – many years before 2014.
It didn’t add up. The Court was bothered by the rides, as that would have taken minimal effort to discover. Why didn’t Captain Eddie entertain offers for the plane? Why would he sign property tax paperwork saying the plane was personal and not commercial-use or held for sale?
The Court
said hobby. No loss for Captain Eddie.
A taxpayer
can win a hobby loss challenge. It happens quite a bit, actually. The key is
that the taxpayer should respond as a businessperson would. If one door shuts
the taxpayer must show that he/she went after another open door, always with
the objective of making a profit. Maybe it played out, maybe it did not – but the
taxpayer tried.
And it helps
to be consistent, the one thing Captain Eddie failed to do.
Our case
this time is Edward G. Kurdziel, Jr v Commissioner.
