Stephens v. C.I.R., 081291 FEDTAX, 11940-89

Docket Nº:11940-89.
Opinion Judge:PATE, SPECIAL TRIAL JUDGE:
Party Name:MARK A. STEPHENS AND CAROL A. STEPHENS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:William M. Zehner, for the petitioners. Harris L. Bonnette, Jr., for the respondent.
Case Date:August 12, 1991
Court:United States Tax Court
 
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62 T.C.M. (CCH) 430

MARK A. STEPHENS AND CAROL A. STEPHENS, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 11940-89.

United States Tax Court

August 12, 1991

William M. Zehner, for the petitioners.

Harris L. Bonnette, Jr., for the respondent.

MEMORANDUM FINDINGS OF FACTS AND OPINION

PATE, SPECIAL TRIAL JUDGE:

This case was assigned pursuant to the provisions of section 7443A(b) and Rules 180, 181, and 182. [1]

Respondent issued a notice of deficiency to petitioners in which he determined a deficiency of $5,289 in their Federal income taxes for 1985. After concessions by both parties, the issues remaining for our decision are:(1) Whether petitioners were engaged in parasailing and photography for profit, and, therefore, are entitled to deduct losses incurred in their parasailing and photographic activities; and (2) whether additional income of $840 received by petitioners is related to either their parasailing or photographic activities.

FINDINGS OF FACT

The parties have stipulated some of the facts, which are so found. The Stipulation of Facts filed by the parties and attached exhibits are incorporated herein by this reference.

Mark A. Stephens and Carol A. Stephens (hereinafter referred to as petitioners), husband and wife, filed a joint income tax return for 1985 with the Director, Internal Revenue Service Center, Austin, Texas. They were residents of McQueeny, Texas, at the time they filed this petition.

During 1985, Mark A. Stephens (hereinafter referred to as Mr. Stephens or petitioner) was employed as an outside salesman by Southwest Office Supply Company (hereinafter referred to as Southwest) in San Antonio, Texas. He sold office supplies, furniture, and interior design services. Typically, he worked for Southwest from 9 a.m. to 4 p.m., Monday through Friday. Carol A. Stephens (hereinafter referred to as Mrs. Stephens) was employed by Traveler's Insurance Company in San Antonio, Texas. Typically, Mrs. Stephens worked for Travelers from 7:30 a.m. to 4:15 p.m., Monday through Friday.

PARASAILING ACTIVITY

During 1985, petitioners also owned and operated Pegasus Parakites and Watersleds (hereinafter referred to as Pegasus), selling parasailing rides, watersled rides, and related equipment. Parasailing is a recreational water sport in which a participant straps a parachute to his back and is pulled by a boat. As the speed of the boat increases, the parachute acts as a sail pulling the participant up until he is floating through the air. Petitioners began Pegasus in the spring of 1985 and terminated it in October 1985. They operated only during the summertime on weekends and holidays.

Prior to 1985, petitioners had a common interest in water activity. Mrs. Stephens was an experienced parasailor. Mr. Stephens was knowledgeable in boats and waterskiing. In 1983 and 1984, petitioners purchased two boats. These boats were used in Pegasus' operation and by petitioners for recreational purposes both before and after organizing Pegasus.

In 1984 and 1985, petitioner learned parasailing by attending the John Catherwood Waterskiing and Parasailing School in Ft. Meyers, Florida. There he learned how to parasail, to operate a boat pulling a parasailor, and to teach participants to parasail. With regard to operating a parasailing business, petitioners also sought out and received advice from several parakite manufacturers and contemporaries in the business.

Pegasus operated on two lakes, Canyon Lake and Lake L.B.J. (both of which were located near petitioners' home). In the spring of 1985, petitioners researched the operating requirements on each of the lakes and found that the restrictions on Canyon Lake were more stringent than on Lake L.B.J. They also found that fees were charged for concessions on Canyon Lake. Consequently, they decided to confine Pegasus' activities to Lake L.B.J., and filed a request for permission to use that lake for commercial purposes with the Lower Colorado River Authority in Austin, Texas. In June, they were informed that, based on a description of their operations, no commercial license was required.

Early in 1985, petitioners had been advised by a parakite vendor that operating from a floating dock reduced the risk of injury to participants and bystanders. They investigated the profitability of acquiring a floating dock and found that using one maximized the number of rides they could give in a specified period of time. They priced the dock and attempted to make arrangements with marinas surrounding Lake L.B.J. to pick people up to take them out to the floating dock. However, because petitioners completed their investigation late in the season, Pegasus never did acquire a floating dock prior to the termination of its operations in October 1985.

To promote business, Pegasus advertised in the yellow...

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