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Tax Memo

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Tax Research Memo
TO: John Bonham
FROM:
RE: Alex and Aubrey Jones (tax year 2010)

Facts: Alex Jones is a computer engineer living in Phoenix, AZ with his wife Aubrey, who is an attorney. He is an independent contractor at ABC Inc, a small software company. His contribution is on an application that can locate donut shops.

The Jones family owns a Christmas tree farm in Oregon. They own the farm since they report the joint federal income tax return about this farm as a sole proprietorship. The Jones also has a home in Honolulu, Hawaii, and put 2 million dollars on remodeling the house. Now the house is leased. The couple who leased Jones' house is running the bed and breakfast business in it. The Jones also have a house in Aspen, Colorado where they stay occasionally when skiing season comes.

The family owns a personal jet which costs them 4 million dollars in 2000 for their different types of convenience. It costs about half million every year for them to operate the jet including depreciation.

Alex and Aubrey have the records and of the usage of the jet in 2000. They had 15 times flying to Oregon farm, twice to Hawaii home, 8 times to Colorado home, and twice to computer conferences, which happened in San Jose, CA and Seattle, WA.

The Jones family reported in 2010 Joint Federal Income Tax Return, the jet expense of half million dollars as a business expense, so that this item is eligible for a tax deduction. However IRS agent Robert Plant, disallowed the deduction since he doesn't treat the jet expense as a business expense. The business expense rule is under Internal Revenue Code (IRC) Sec 162.

Issues

Whether or not Alex and Aubrey Jones can deduct the $500,000 on their 2010 joint federal income tax return?

Whether or not the operating personal jet expense for 15 times to the Oregon farm can be classified as a business expense?

Whether or not the operating personal jet expense for the trips to Hawaii home and Colorado home can be classified as a business expense?

Whether or not the operating personal jet expense for the trips to computer conferences located in San Jose, California and Seattle, Washington can be classified as a business expense?

Conclusions

Alex and Aubrey Jones can deduct some portion of the $500,000 on their 2010 joint federal income tax return.

The operating personal jet expense for 15 times to the Oregon farm can be classified as a business expense.

The operating personal jet expense for the trips to Hawaii home and Colorado home can't be classified as a business expense.

The operating personal jet expense for the trips to computer conferences located in San Jose, California and Seattle, Washington can be classified as a business expense.

Analysis

Section 162 of the Internal Revenue Code allows a taxpayer to “deduct all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” Since the Jones' Christmas tree farm in Oregon operates in a businesslike model, which means a "for profit" business rather than a hobby business, they can report the trips to farm in Oregon as ordinary and necessary expenses.

“We may assume that the payments were necessary for the development of the business, at least in the sense that they were appropriate and helpful. Many necessary payments are charges upon capital. There is need to determine whether they are both necessary and ordinary.” See Welch v Helvering (1933, S Ct) 12 AFTR 1456, 290 US 111, 3 USTC 1164, haft (1933, Ca.) 12 AFTR 348, 63 F2d 976, which had aff'd (1932) 25 BTA 117.

Section 280A of the Internal Revenue Code provides that a taxpayer is not allowed to make deductions with respect to his dwelling unit but that an exception applies where a portion of the dwelling unit is used exclusively on a regular basis as the principal place of business for any trade or business of the taxpayer. See I.R.C. section 280A(c)(1)(A).

However, neither the home in Hawaii nor the home in Aspen is dwelling units for business of them. The home in Hawaii is least to a couple, who operate the house as a bed and breakfast. The home in Aspen is a recreation place for Alex and Aubrey.

Deduction for home-office expenses denied as business expense for failure to show home-office was used exclusively and regularly for business. See Fisher, Ronald Edward, (1986) TC Memo 1986-141, PH TC Memo 86141.

In addition, according to Section 162 of the Internal Revenue Code, the operating personal jet expense for the trips to computer conferences located in San Jose, California and Seattle, Washington can be classified as a business expense, since Alex Jones is a computer engineer and is an independent contractor at a small software company. However, Alex Jones bears the burden of proving his expenditures are “ordinary and reasonable” under section 162. See Love Box Co., 842 F.2d at 1216. Failure to prove the reasonability of the expense, the deduction may be denied.

Overall, the Jones should be allowed to deduct the operating personal jet expense for the trips to computer conferences, and to the Oregon farm.

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