The Tax Court held that a doctor couldn’t group his LLC, which held a personal airplane for use in flying to patients in rural areas, with his interests in his medical practice for purposes of Code Sec. 183. In addition, the court held the airplane activity was not operated for profit, noting that the doctor was the only person in his practice who used the plane, and even then it only shaved a few minutes off his travel time. Steinberger v. Comm’r, T.C. Memo. 2016-104.
Background
Dr. Richard Steinberger has practiced medicine since 1989, specializing in urology. He practiced as an employee and shareholder of Wichita Urology Group, P.A. (WUG) in Kansas. He and six other doctors each owned an equal one-seventh interest in WUG.
In 2005, Dr. Steinberger sought advice from Advocate Aircraft Taxation Co. (Advocate) regarding the purchase and operation of an airplane for use in WUG’s medical practice. In 2006, Advocate formed two limited liability companies to own and operate an aircraft: Air Urology, LLC (AU), taxed as a disregarded entity, and Air Urology Investments, LLC (AUI), taxed as a partnership. Together, Dr. Steinberger and his wife, Dr. Maria Riva, held a 100 percent interest in AUI. AUI was the sole member of, and wholly owned, AU. AU purchased the airplane, and entered into leasing agreements with AUI, Dr. Steinberger, and WUG.
WUG’s doctors would occasionally provide services to patients at rural clinics in Wellington and Anthony, Kansas. During the years at issue Dr. Steinberger was the only WUG doctor who flew to these rural clinics. Dr. Steinberger alternated flying to Wellington and Anthony once a week. It would take Dr. Steinberger approximately 40-45 minutes to drive to Wellington and approximately 35-40 minutes to fly there. It took him approximately 85-90 minutes to drive to Anthony and approximately 45-50 minutes to fly there.
Dr. Steinberger and Dr. Riva reported passive losses from AUI of $132,212, and $26,759 on the Schedules E attached to their returns for 2008, and 2009, respectively. On AUI’s 2008 and 2009 Forms 1065 “PROPERTY MGMT” is identified as the principal business activity and the principal product or service. Attached to the 2008 and 2009 Forms 1065 were elections to group AUI and WUG for purposes of Code Secs. 469 and 183.
On audit, the IRS determined that AUI’s airplane activity was not engaged in for profit and disallowed the passthrough losses attributable to that activity.
Analysis
To determine whether and to what extent the hobby loss rules of Code Sec. 183 and its regulations apply, the activity of the taxpayer must be ascertained. Under Reg. Sec. 1.183-1(d), a taxpayer’s multiple activities may be treated as one activity if the activities are sufficiently interconnected. Under Reg. Sec. 1.183-1(d), the most important factors to be considered are:
(1) the degree of organizational and economic interrelationship of the undertakings,
(2) the business purpose served by carrying on the undertakings separately or together, and
(3) the similarity of the undertakings.
The taxpayers argued that AUI and WUG’s activities were a single activity in 2008 and 2009 because Dr. Steinberger and WUG had common business concerns and goals that prompted him to form AUI, acquire the airplane, and then use it to fly to rural communities served by WUG and Dr. Steinberger.
The court, however, noted that WUG was formed in 2001 and had been in existence for five years before the taxpayers formed AUI. The court found that Dr. Steinberger was the only link between the two entities, and WUG played no part in acquiring the airplane. The degree of WUG and AUI’s organizational and economic interrelationship, the court held, was not strong enough to support a finding that the two were a single activity under the first factor in Reg. Sec. 1.183-1(d).
With regard to whether WUG and AUI had the shared business purpose (factor 2) of serving WUG’s patients in the rural Kansas communities of Wellington and Anthony, the court pointed out that Dr. Steinberger did not advertise the use of the airplane for WUG business. To the contrary, he was the only WUG doctor who used the airplane and it wasn’t leased to any other parties. Additionally, the court stated, WUG did not benefit from Dr. Steinberger’s use of the airplane because he could have just as easily driven to Wellington and Anthony, as both locations were a short drive from his residence.
In applying the third factor, the court noted there were no similarities between the two activities: one was a medical practice specializing in urology, the other involved an airplane Dr. Steinberger purchased because he enjoyed flying and personally preferred driving. Accordingly, the Court found that the taxpayers’ characterization of AUI and WUG as a single activity was artificial and not supported by the facts and circumstances of the case.
The taxpayers alternatively argued that if AUI and WUG were not a single activity for Code Sec. 183 purposes, AUI on its own was engaged in for profit during 2008 and 2009. A review of all of the facts and circumstance and the entire record, the court found, showed that AUI was not engaged in the airplane activity to make a profit and that a detailed factor-by-factor analysis was unnecessary. The court found that the majority of flights were for training and maintenance or personal flights, and noted that AUI was not in the airplane rental business. Furthermore, the court said, Dr. Steinberger certainly took personal pleasure in flying, noting that he has been a licensed pilot for as long as he has been a licensed physician, and that he testified that he preferred flying to as opposed to driving to Wellington and Anthony. On the basis of the record, the court held that AUI was not engaged in the airplane activity for profit for 2008 and 2009, and sustained the disallowance of the airplane activity’s flow-through losses for 2008 and 2009.
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