S Corporation and C Corporation Cannot Aggregate Activities to Determine Profit Motive.

• Author: Fiore, Nicholas J.

Individual X is sometimes required to travel away from home on business. For the first, second and third years, X claimed substantial losses on his individual Federal income tax return, attributable to S corporation A. A is identified as an "airplane charter" Until several years before the tax years at issue, X was the sole shareholder of A. Since that date, Trust C (X's grantor trust) has been the 100% owner of A. C also owns C corporation B, which is X's personal service corporation. A has never shown a profit and has instead sustained losses each year for at least d years.

A owns several airplanes. They are not available for lease to the general public. A does not have an FAA (Federal Aviation Agency) Part 135 license, which is apparently necessary to lease the airplanes to the general public. Instead, the planes are almost exclusively used by X and his family. The only income that A earns comes from B. B contracts with other entities for X's services, and X sometimes uses A's aircraft to fly to business locations. X is a pilot and also uses the airplanes for personal reasons. Some allocation has been made on A's books for X's personal use of the airplanes.

Analysis

Sec. 183(a) provides that, if an individual or an S corporation is not engaged in a for-profit activity, the IRS will not allow a deduction attributable to the activity, except as provided in that section. Sec. 183(c) defines an activity not for-profit as any activity other than one for which deductions are allowed for the tax year under Sec. 162 or 212(1) or (2). Deductions are allowable under Sec 162 or 212(1) or (2) only when a taxpayer engages in an activity with an actual and honest objective of making a profit. Sec. 183(d) (as it applies to the present case) provides that an activity will be presumed to be for-profit if income exceeds deductions in three out of five consecutive tax years.

Regs. Sec. 1.183-2(b) lists some of the factors to Consider in determining whether an activity is for-profit. The factors listed include:

1. Manner in which a taxpayer carries on an activity;

2. Expertise of a taxpayer or his advisers;

3. Time and effort expended by a taxpayer in carrying on an activity;

4. Expectation that assets used in an activity may appreciate in value;

5. Success of a taxpayer in carrying on other similar or dissimilar activities;

6. Taxpayer's history of income or losses for an activity;

7. Amount of occasional profits, if any, that a taxpayer earns;

8. Financial status...