Tax court upholds IRS on charter boat tax accounting

A recent tax court case caught my attention because of the subject matter – a charter boat used as a tax shelter – but it quickly became apparent that the case had more to do with how different my boat charter clients are from the subject case.

Small business activities, including charter boat activities, are often used as a tax shelter. IRS documented many ways where the tax deductions do not meet legal requirements. One powerful tool in closing these tax shelters is IRC 183 that covers activities not engaged in for profit.

IRS has the ability to determine that a taxpayer activity was not engaged for profit and then recharacterize the tax reporting of financial transactions accordingly. However, that type of IRS recharacterization typically makes little difference for most middle income taxpayers. Income and expenses are still what they are and a boat charter activity would not have a big impact on a taxpayer no matter how the tax reporting is handled.

This tax court case is different because the taxpayer is in the upper echelon of one percenters, and so IRS recharacterization of transactions had a large tax impact. It’s not the type of taxpayer issues that I will encounter in our coastal area.

The tax court case referenced:

The latest on this topic from IRS (September 2021):

The prior audit guide from 2009: