Antonides v. Comm'r of Internal Revenue

• Decision Date: 27 September 1988
• Docket Number: 17542-86,17543-86.,Docket Nos. 10364-86
• Citation: 91 T.C. 686,91 T.C. No. 45
• Parties: GARY ANTONIDES, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

91 T.C. 686

91 T.C. No. 45

GARY ANTONIDES, ET AL., 1 Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 10364-86

17542-86

17543-86.

United States Tax Court

Filed September 27, 1988.

In 1981, Ps purchased a yacht which they immediately leased back to the seller, to be used for chartering to others. In 1982, Ps incurred and claimed as deductions losses from this venture from sources such as repairs and maintenance, depreciation and financing costs. R disallowed the claimed loss deductions on the ground that Ps' chartering venture was not an activity entered into for profit within the meaning of I.R.C. section 183. Upon consideration of the whole record,

HELD, that Ps have failed to establish that their yacht chartering venture was entered into for profit.

HELD FURTHER, that Ps are not liable for additions to tax for negligence under I.R.C. section 6653(a).

HELD FURTHER, there was no substantial authority to support Ps' claimed loss deductions as permitted by I.R.C. section 6661(b)(2)(B)(i). Thomas J. O'Rourke and John J. Mullenholz, for the petitioners.

Alan C. Levine, for the respondent.

WELLS, JUDGE: ^*

In timely statutory notices of deficiency, respondent determined deficiencies in Federal income tax and additions to tax for taxable year 1982 as follows:

+-----------------------------------------------------------------------------+
                ¦                            ¦        ¦          ¦Additions to tax            ¦
                +----------------------------+--------+----------+----------------------------¦
                ¦                            ¦Docket  ¦          ¦Sec.        ¦Sec.      ¦Sec.¦
                +----------------------------+--------+----------+------------+----------+----¦
                ¦Petitioners                 ¦No.     ¦Deficiency¦6653(a)(1)  ¦6653(a)(2)¦6661¦
                ¦                            ¦        ¦          ¦2           ¦          ¦    ¦
                +----------------------------+--------+----------+------------+----------+----¦
                ¦Gary Antonides              ¦10364-86¦$9,700    ¦$485        ¦50 percent¦$970¦
                +----------------------------+--------+----------+------------+----------+----¦
                ¦                            ¦        ¦          ¦            ¦of        ¦    ¦
                ¦                            ¦        ¦          ¦            ¦interest  ¦    ¦
                +----------------------------+--------+----------+------------+----------+----¦
                ¦                            ¦        ¦          ¦            ¦on $9,700 ¦    ¦
                +----------------------------+--------+----------+------------+----------+----¦
                ¦Richard and Phyllis         ¦17542-86¦4,430     ¦---         ¦---       ¦--- ¦
                ¦Herdendorf                  ¦        ¦          ¦            ¦          ¦    ¦
                +----------------------------+--------+----------+------------+----------+----¦
                ¦David and Mary Diane Smith  ¦17543-86¦8,119     ¦---         ¦---       ¦812 ¦
                +-----------------------------------------------------------------------------+
                

Respondent concedes that the investment tax credits claimed by petitioners in 1981 are not subject to recapture in 1982. Petitioner Antonides concedes that he understated taxable income for the year at issue by the $5,439 he received from an entity called Maratech.

The remaining issues for decision are:

1. Whether petitioners' yacht chartering activities constituted an ‘activity not engaged in for profit‘ within the meaning of section 183(a); 2. Alternatively, whether section 280A limits the deductibility of deductions claimed by petitioners with respect to their yacht chartering activity;

3. Whether petitioners properly allocated income and expenses generated in their yacht chartering activity in accordance with their partnership agreement;

4. Whether petitioner Antonides is liable for the additions to tax for negligence as provided by sections 6653(a)(1) and 6653(a)(2); and

5. Whether petitioners Antonides and the Smiths are liable for additions to tax for substantial understatement of liability as provided by section 6661.

In his trial memorandum and opening statement, respondent for the first time argues that petitioners' use of the $18,958 of advance lease payments to which they were entitled as down payment on their yacht purchase was a sham which should be given no effect for tax purposes. We hold that petitioners did not receive fair notice of this issue and we will not consider it. Seligman v. Commissioner, 84 T.C. 191, 197-199 (1985), affd. 796 F.2d 116 (5th Cir. 1986); Estate of Horvath v. Commissioner, 59 T.C. 551, 554-557 (1973).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.

Gary Antonides (Antonides) resided at Edgewater, Maryland, at the time his petition herein was filed.

Richard and Phyllis Herdendorf are husband and wife. They resided at Buffalo, New York, at the time their petition herein was filed.

David and Mary Diane Smith (the Smiths) are husband and wife. They resided at Clifton, Virginia, at the time their petition herein was filed.

All of the petitioners are cash basis, calendar year taxpayers. David Smith (‘Smith‘) and Phyllis Herdendorf are brother and sister.

Antonides and Smith have known each other since their days as classmates at the United States Naval Academy during the mid-1950s. While at the Naval Academy each received instruction in sailing and developed an interest in sailing and sailboats. This interest continued after graduation from the Academy. Antonides has owned sailboats for his personal use since the 1970s. Although he never owned a boat before the one now in issue, Smith had access to boats which he used for pleasure sailing. The Herdendorfs are also avid sailors who over the years have owned a number of boats which they have sailed for pleasure on Lake Erie near their home in Buffalo, New York.

At some time in 1979, Smith became interested in acquiring a yacht. He began visiting boat shows and frequenting marinas to familiarize himself with the types of vessels available. He also began reviewing the literature in boating periodicals and discussed the economics of yacht ownership with friends who were boat owners, boat brokers, and others. Smith's research revealed that the value of yachts had been appreciating since the mid-1970s. Those in the boating industry attributed the appreciation in yachts to several factors. First, the energy crises of the early and mid-1970s had causes dramatic increases in the price of fuel and other petroleum based products. The increased fuel costs greatly increased the costs of operating motor powered vessels. As a result, many boating enthusiasts began to move away from powerboats into the more economical sailboats. The resulting increase in demand for sailboats drove up the prices of both new and used sailboats.

The energy crises also contributed to the increased cost of fiberglass, a petroleum-based product and the main raw material used in sailboat construction. The increased raw material costs caused increases in the prices of new sailboats, which also had the effect of increasing the value of used boats.

A final factor contributing to sailboat appreciation during the late 1970s was the relative weakness of the U.S. dollar vis-a-vis other currencies. This increased the cost of importing vessels constructed in foreign boatyards and in many cases made the cost of imports prohibitive. This limit on the supply of boats available, when coupled with increased demand, contributed to the appreciation in value of sailboats available on the domestic market.

Sometime during the summer of 1981, Smith approached Antonides and the Herdendorfs and proposed that they pool their resources and acquire a yacht jointly. On December 30, 1981, petitioners jointly purchased a new 36-foot Watkins sailing sloop from Nautilus Yacht Sales (hereinafter sometimes referred to, collectively with its affiliates, as ‘Nautilus‘). There were three entities involved in the Nautilus operation. Nautilus Yacht Sales was a sales entity which offered a sale/leaseback program under which a purchaser was offered an opportunity to purchase a boat from Nautilus Yacht Sales and lease it back to Nautilus Boat Club. Nautilus Boat Club offered memberships to persons who were interested in sailing but did not wish to buy a boat. For an annual membership fee, club members were entitled to use of a sailboat from the Nautilus Boat Club fleet for a prescribed number of days. West River Yacht Harbor was a condominium association which owned slips and other facilities at the site of the Nautilus Boat Club.

Antonides and Smith each acquired a one-third interest in the vessel acquired from Nautilus, with the Herdendorfs collectively acquiring the remaining one-third interest. Petitioners named the boat ‘Classmates.‘ The purchase price of the boat was $94,790. Immediately upon purchase, the boat was leased back to Nautilus for a three-year period ending December 30, 1984. The total lease payment for the three-year period was $18,958, of which $12,639 was due on settlement, and the remaining $6,319 payable on January 15, 1982.

Under the Nautilus sale/leaseback program, Nautilus was responsible for all routine maintenance on boats leased to its charter fleet. Owners who placed their vessels in the lease program became entitled to use of the West River Yacht Harbor marina facilities and the personal use of their vessel (or a similar vessel) for 21 days per year. Additional personal usage was possible only if their boat was available.

The Nautilus leaseback program enabled purchaser/lessors to own a yacht with little or no initial cash outlay. Petitioners in this case made an initial cash deposit of $1,000 Classmates. Instead of being applied directly to the purchase price of the boat, the $1,000 deposit, plus an additional check from Smith for $293, was used to prepay slip rentals and insurance of $403 and $840, respectively. The remaining $50 was applied to interest due on the Herdendorf note. They...