Territorial Limitations - Aviation Insurance & Risk Management ...

SCHUMACHER V. COMMISSIONER (TCS 2003-96)
Gene Schumacher owns 90% of the shares of Pro Flight
Center, Inc., a fixed based operator (FBO) located in Beaver
Falls, Pennsylvania. Because he had a minority partner
who did not have sufficient capital for the additional aircraft
purchases, he acquired them separately. Upon examination
the Internal Revenue Service asserted that the aircraft
leasing business was separate and apart from the FBO
business, and Mr. Schumacher’s loss in the rental business
was passive. Mr. Schumacher asserted, that in considering
his undertaking of leasing the aircraft to his undertaking of
operating an FBO, he should be allowed to group the two as
a single activity. The Tax Court sided with Mr. Schumacher,
finding the most significant fact to be that he created the
leasing activity solely to benefit the FBO activity.
RABINOWITZ V. COMMISSIONER
(TC MEMO 2005-188)
Leonard Rabinowitz worked in the high-end women’s clothing
industry throughout California. He and his partner established
a second company to acquire a Mitsubishi Diamond
Jet. His business advisors recommended that he not
acquire the aircraft in his clothing
business due to the impact it would
have on his debt/equity ratio. He
ultimately traded the Diamond for a
Falcon 200 and his principal use of
the aircraft shifted to charter. The
Tax Court refused to allow the taxpayer
to group his activities under
the “Hobby Loss” rules because
they lacked an economic interrelationship.
The Court found that
the clothing company was a mere
charter customer, as were numerous
other third parties. Although
Rabinowitz prevailed in his trade
or business argument, he was required
to prove it without the benefit
of grouping.
MISKO V. COMMISSIONER
(TC MEMO 2005-166)
Fred Misko was a trial attorney
who operated out of a C corporation
which focused on class action
lawsuits. In connection with these
lawsuits, he required the most modern
computer graphics and videotape
equipment. His accountant
advised him that he should acquire
the equipment in a separate entity
to help control Medicare tax on his
AIRCRAFT TAX PLANNING
“...transactions that are not
properly planned may
result in adverse income
tax consequences. ”
wages. Mr. Misko attempted to group his C corporation and
his leasing activity to show that the leasing company was
operated for profit. The Tax Court acknowledged that a C
corporation cannot be grouped with an individual; grouping
is limited to flow-through entities.
Nonetheless, for purposes of determining if the taxpayer
had a profit objective, his law firm earnings were examined
because the use of the equipment was integral to his practice.
His salary was considered even though his C corporation
earnings were not. The passive activity limitations did
not present a problem because the rent was incidental to
his law practice. Mr. Misko succeeded because he could
show sufficient interrelationship between the two activities.
WHY GROUP?
One of the factors in determining whether an undertaking
is a trade or business, or a hobby, is the potential to derive
personal pleasure from the activity. I have had the opportunity
to meet many aircraft owners that love their work; but
none that love their work more than they love their airplane.
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Aviation Insurance & Risk Management
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