Hobby Loss Rules

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Case Limits IRS Application of Hobby Loss Rules

November 28, 2011

Many business owners conduct business using several different legal entities, including C corporations, S corporations, partnerships, and limited liability companies (LLCs). For liability and other business reasons, they will often put their aircraft in one of their business entities or in a separate leasing company that leases the aircraft to one or more business entities.

Although these arrangements generally do not create any income tax benefits for the owner, the depreciation rules often cause the entity owning the aircraft to have a tax loss. In recent years, IRS auditors have tried to disallow deduction of these losses, relying on the “hobby loss” rules.

In Morton v. United States, the court held that business aircraft operations were considered part of a "unified business enterprise" and thus were not subject to hobby loss rules. The court included Morton’s aircraft operations in the “unified business enterprise” for hobby loss purposes arguably without applying the list of aggregation factors in the Income Tax Regulations. This case may also be helpful to taxpayers because the other businesses in the “unified business enterprise” included a C corporation.

Review this NBAA Tax Committee article to learn how this case may impact the selection of an aircraft ownership structure for certain aircraft owners and operators.

Review the Complete Article (765 KB, PDF)

About the Author

Phil Crowther, a member of the NBAA Tax Committee, is counsel at the law firm of Jackson & Wade, LLC. He is an attorney, an MBA and a CPA with over 30 years of experience assisting clients with their aviation tax planning needs. For the past 15 years, he has been a regular speaker on aviation tax issues at tax conferences and forums. He has also written over a hundred articles discussing aviation tax issues for NBAA and "Twin and Turbine" magazine and other publications, including an article on taxation of fractional interests in the Journal of Air Law and Commerce.

He can be reached at (913) 338-1700 or [email protected]. John Hoover also assisted with this article.