The Tax Court recently rebuffed a taxpayer’s attempt to deduct losses incurred through the ownership and chartering of a jet aircraft to reduce income generated by his real estate business. Charles Brumbaugh was engaged in the business of developing low-income housing projects. In 2005, he purchased property to be developed that was located northeast of Oakland, California. His company was based in Bakersfield, and flying commercially to the job site was very time-consuming. To make his trips less time-consuming, he purchased a jet aircraft. He entered into an agreement with an aviation management company to maintain his aircraft, provide pilots and charter the jet to third parties when he was not using it. The charter activities with respect to the aircraft resulted in a tax loss of around $350,000 for the 2007 tax year.
The loss from chartering the jet was a passive loss because the taxpayer did not participate in the activity for more than 500 hours. However, he did participate for more than 500 hours in his real estate business, so he took the position that the chartering of the jet and his real estate development and construction were the same activity for purposes of the passive loss rules. If the activities could be so combined, the taxpayer did participate for more than 500 hours and the tax loss from the jet would not be a passive loss.
Upon audit, the IRS did not allow the activities to be grouped together and the taxpayer took his case to the Tax Court. In Brumbaugh v. Commissioner (April 3, 2018), the court agreed with the IRS. The court looked at factors set forth in the passive loss regulations to determine whether different activities can be grouped as a single activity: i) similarities or differences between the two businesses; ii) extent of common control; iii) extent of common ownership; iv) geographic location of the business activities; and v) interdependence between the activities. The court determined that the two businesses had no real similarity. The taxpayer did hold controlling interests in both businesses; however, they were not geographically proximate to each other as the real estate activity was being conducted northeast of Oakland during the year at issue and the jet chartering took place from the Ontario Airport. Finally, the court found there was no interdependence between the businesses as they did not have the same customers and did not even have meaningful transactions between them. In fact, the taxpayer used his own plane only one time during 2007. The balance of the time he needed to travel, his plane was being chartered to a third-party customer, so he chartered another plane from the management company.