T.C. M em o . 2 0 1 9 -2 0

UNITED STATES TAX COURT

EDWARD G. KURDZIEL, J R., Pet it i on er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 2 1 1 8 6 -1 2 , 1 2 67 4 -1 3
. Fi l edM arch 2 1 , 2 01 9
.

Ro b ertJ . Gu m s er, fo r p et i t i o n er. M i ch ael S. Hen sl ey , Eri n Kat h l een Sal el , an dJ effreyL. Hei nk el , fo r
res p o n d en t.

M EM ORANDUM FINDINGS OF FACT AND OPINION
HOLM ES, J u d g e: EdwardG. Kurd zi el i s th e o nl y m an i n Am eri ca l i cen s ed t o fl y a Fai rey Fi refl y . He i s al s o th e o nl y m an i n Am eri ca wh o h as a Fi refl y t o fl y . Bu t res t o ri n g t h is o l dW W II fi g h t er an d s ub m ari n e h u n t er t o o kb al es o f m o n ey ,- 2
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[* 2 ] wh i ch h e’ s n ev er g ot t en b ack . Kurd zi el s ay s th e res to rat i on was a b u s i n es s
an d cl ai m edb ig d edu ct i o ns fo r i to n h i s return s fo r 2 0 0 7 th ro u g h 2 0 1 0 . Th e Co m m i s s i o n er s ay s i twas al l ju s ta v ery ex p en si v e h o bb y . FINDINGS OF FACT Edward Ku rd zi el , al s o kno wnas Cap t ai n Ed d i e, i s a h i g h l y s k i l l ed
m ech an i cal en g in eer an d an ex p eri en cedp i l o t. He fi n i s h ed h i g h s ch o o l wh en h e
was ju s t1 6 y ears o l d an d wen tt o M arquet t e Un i v ers i ty as “ th e fi rs tk i dev er accep t ed* * * aft er two y ears o f h i g h s ch o o l
. ” Ku rd zi el ’ s h i g h er edu cat i o n --p ai d fo r i n fu l l b y

th e Un i t edSt at es Nav y --d i dn’ t en dwi th h is u n d erg radu at e d eg ree. At1 9 h e l an dedi n g radu at e s ch o o l fo r en g i n eeri n g, an dal l th e wh i l e wo rk edas a p ri v at e p i l o to n th e s i d e. Sch o o l fl ew b y , an dKu rd zi el was o n l y 2 1 wh en h e recei v eda co m m i s s i o n i n the Nav y . Th ere h e s pen t2 5 y ears as a fi gh t er p i l o t , 8 1⁄2 o f wh i ch were o n act i ve du ty . Aft er h e was h o n orab ly d i sch arg ed , h e s tart edfl y in g 7 47 s fo r No rt h wes tan dth enDel t a Ai rl in es , wh ere h e rem ai n s a cap tai n . Int o t al h e h as 4 5 y ears o f fl y i n g ex p eri en ce u n d er h i s wi ng s .- 3
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[* 3 ] I. Th e Fai rey Fi refl y A. Back g ro u n dan d Pu rch as e In 1 9 9 4 , n o tl o n g aft er b eg i n n i n g h i s co m m erci al ai rl i n e career, Ku rd zi el b o u g h ta t wo -s eatfi g h t er ai rcraft kn o wnas th e Fai rey Fi refl y W B5 1 8 / N5 1 8 W B. Am eri can warp l an es o f 7 5 y ears ag o h ads o m e g reat n am es --Hel l cat s , Av en g ers , Fl y i ng Fo rt res s es , Dem o n s , an d Th u n d erb o l t s . Our Bri t i s h al l i es al so h ads o m e fi ne n am es fo r t h ei r ai rcraft --Hu rri can es an dSp i t fi res , Tem p es t s an d Ty

p h oo n s . An dthen there were t h e warb ird s m ad e b y Fai rey Av i at i o n, wh i ch i n cl u d edth e Al b aco re an dBarracu d a, t h e Sp earfi s h an d t h e Seafo x --an dthe p l an e atth e cen t er
o f t h es e cas es , th e Fai rey Fi refl y . Th e Fi refl y

en t ereds erv i ce as a carri er-b as ed fi gh t er fo r t h e Ro y al Nav y t o wardth e en do f t h e war, an db ecam e a s p eci al i s ti n
an t i s hi p p i n g an dan t i s ub m ari n e warfare. See J o h n Ri ck ard , Fai rey Fi refl y - Dev el o pm en tan dCo m

b at , M i l i t ary

Hi s to ry En cy cl o ped i a o n the W eb (J an . 3 1 , 2 0 0 9 ), h t tp : //www.h i s t o ry o fwar.o rg / art icl es /weap o n s_ fai rey

_ fi refl y .h t m l. It s l at e b i rt h m ean tth ere were far fewer b u i l tth an th e m ore fam o u s Hu rri can es an d Sp i t fi res . See i d . Acco rd in g t o Ku rd zi el , th e Fi refl y “ fi rs t fl ew i n ‘ 4 1 ” an d“ was th e fi rs tBri t i sh ai rp l an e t o fl y o v er J ap an an dTo ky o i n 1 9 4 5 du ri n g th e [o ccup at i o n ] o f J ap an .” Lat er m o d el s o f t h e Fi refl y o p erat ed wel l i n t o th e 1 9 6 0 s .- 4
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[* 4 ] Ku rd zi el fi rs ts p o t t eda Fi refl y i n 1 9 7 4 wh en i twas feat u redo n th e co v er o f a fl y i n g m ag azi ne. Nearl y 2 0 y ears l at er, i n t h e fal l o f 1 9 9 3 , h e l earn edth ata Fi refl y was fo r s al e i n Au s tral i a. He h adt o h av e i t . “ I b ou g hti t s ig h t u n s een b as i cal l y * * * I th o u g h ti t was a g reat ai rp l an e” an d“ [n ] ob o dy kn ew wh ati twas i n the Un i t edSt at es .” He m ad e a co up l e t ri p s t o s ee t he Fi refl y i n p ers o n an dth en
co n su l t edwi th s om e m ech an i cs . Th e Fi refl y h e wan t edh adn o tfl o wnfo r y ears , p o s s i b l y d ecad es . Bu tKu rd zi el b o u g h ti t fo r aro u n d $ 20 0 , 0 0 0 , wh i ch h e fi n an ced b y b o rro wi n g ag ai n s th i s h o u s e fo r wh ath e co u l dn o tp ay fro m h is o wn l i qu i d fu n d s. Sh i p pi ng co sth i m an ad d it i o n al $ 6 0 ,0 00 as th e ai rp l an e h adt o b e s h i p p ed fro m Au s tral ia. Th is was cert ai n l y n o s m al l i n v es t m en t
. Aro u n d th e s am e t i m e t h atKu rd zi el b o ug h tth e Fi refl y , h e al so t o o k“ earl y , earl y l o o ks attry in g t o d o s o m et h i n g wi th the ai rp l an e.” Hi s fi rs t p lan was t o s el l ri des o n th e p l an e. He es t i m at edth e cas h th atth i s wo u l db ri n g i n . He t al k edwi t h
m ech an i cs t o reck o n th e co s to f res t o rat i o n an dm ai n ten an ce, an d cal led

“ i n su ran ce co m

p an i es t o fi g u re o u ti n s u ran ce i f [h e was ] g oi n g t o h av e p eo p l e fl y i n g i t* * * fo r ch art er o r t rai n i n g .” He al s o co ll ab o rat edwi th m em b ers o f t h e Ro y al Au s tral i an Nav y

o n a p l ant o res t o re th e ai rp l an e, as b o th p art i es wan t edt o
s ee t h e Fi refl y

fl y in g ag ai n .- 5
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[* 5 ] Th e Fi refl y

was 6 0% res t o redwh en Ku rd zi el b o u g h t i t , b u t i t s t i l l req u i reda l arg e i nv es t m en t o f t i m e an dm o n ey t o b eco m e ai rwo rt h y . It t o o k “ [e] i g hty ears
an d 4 5 ,0 0 0 m an h ou rs ” t o fu l l y res t o re t he p l an e, an das m an y as 1 0 fu l l -t im e
wo rk ers . Bey on dp ay i n g th es e wo rk ers , Ku rd zi el d ev o t edth o u s an d s o f h ou rs t o th e p ro jecth i m s el f, dri v i n g t o th e res t o rat i o n wo rk s i t e i n Co l o rad o an db acktwi ce
a m on th . Acco rd i n g t o h i m , th e res t o rat i o n an d m ai n t en an ce o f t h e Fi refl y was “ a fu l l -t i m e jo b ” an d “ t ak es ev eryth i n g y o uh av e.” As i s tru e o f al m o s tal l o l dp l an es , th ere were n o wo rk in g s p are p art s av ai l ab l e o n th e aft erm ark et . Th i s m ean t Ku rd zi el h adt o d es i g n m an y o f t he Fi refl y ’ s rep l acem en tp art s h i m s el f. “ I d i dal l th e i n s tru m en t s , d i dth e o x y g en s y s tem
. I m ean , the m ech an i cs were b as i cal l y m y h an ds . It ’ s m

y d es i g n.” Th i s was a rem ark ab le am o u n tan dqu al it y o f wo rk --v ery

few p lan es o f t h at ag e ev er g etb acki n t o th e s ky . Bu tKu rd zi el ’ s Fi refl y t o o ko ff i n 2 0 0 2 aft er i tg o t
an “ ai r wo rt h i n es s cert ifi cat e” fro m th e Fed eral Av i at i o n Ad m i n i s trat i o n (FAA). Fo r a p il o t wi th t od ay ’ s trai n in g t o l earn h o w t o fl y s uch a v en erab l e p lan e i s al s o a
rem ark ab l e ach i ev em en t, an dKu rd zi el g o tth e FAA t o l icen s e h i m t o fl y i t . To th i s d ay , h e i s th e o n l y

p ers o n wi th s u ch a l i cen s e. Th e Fi refl y s o o n b eg an wi n ni n g p ri zes ; i tearn edth e t i t l e o f g ran dch am p i o n i n th e co u n try ’ s p rem i er ai r
s h o w i n Os h k o s h, W i s co n s i n , an d wo n an o ther at th e Nat i o n al Av i at i o n Heri t ag e- 6
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[* 6 ] In v i t at i o n al i n Ren o , Nev ad a. Th e Fi refl y ’ s fam e t o o ko ff, an d i tl an d edo n 2 0 o r 3 0 d i fferen t m ag azi n e co v ers . See, e.g ., J o h n So th am , Th e Ch am p : Fro m th e Deck s o f W o rl dW ar II Ai rcraft Carri ers t o To d ay ’ s Ai rs h o w Ci rcu i t -t h e J o u rn ey o f a Ro y al Au s tral i an Nav y Fai rey Fi refl y , Ai r & Sp ace M ag azi n e (J u l y 2 0 0 3 ), h t tp s : //www.ai rs p acem ag .co m / m i l i t ary -av i at i o n / th e-ch am p -4 81 0 43 8 /
. B. “ Ai rp lan e Leas i ng ” Act i v i ty M ak i n g m o n ey

wi th th e Fi refl y

was m o re d i ffi cu l t . Kurd zi el i ni t i al l y fo rm edFi refl y , LLC, t o o wnan do p erat e t he ai rp l an e. Bu ti n 2 00 3 , h e b ro u g h ti t t o Cal i fo rn i a an dtran s ferred i t s o wn ers h i p t o a t ru s tt o ach i ev e m ore fav o rab l e
s t at e-t ax treat m en t . Kurd zi el wan tedt o earn s om e m on ey b y fl y i n g th e p l an e at
m i l i taryai r s h o w s , wh ich req u iredh i m t o l earn h o w t o b eco m e a g o v ern m en t
co n tract or. He d i d, an di n 2 0 0 4 m etth e req u i rem en t s t o co n tract wi th th e fed eral g o v ern m en t . Th es e s t i rri n g s o f b u s i n es s act i v i ty l ed Ku rd zi el t o rep orth i s Fi refl y i n co m e an d ex pen s es o n th e Sch edu l e C, Pro fi t o r Lo s s Fro m Bu s in es s , o f h i s 2 0 0 5 t ax retu rn . Bu t fo r b o th th atan dl at er t ax y ears , Ku rd zi el rep o rt edth ath i s Fi refl y act iv i ty was i n th e b u si n es s o f “ A i rp lan e Leas i n g .” Th i s was n o ttru e-- Ku rd zi el h as n ev er l eas edo u t th e Fi refl y . Bu t rep o rt in g h is Fi refl y act i v i ty as a b u s i n es s b ro u g h twi th i ts o m e b i g t ax ad v an t ag es . Th e g reat g ob s o f m on ey th at th e res t o rat i on h adreq u iredl edKu rd zi el t o cl ai m an ad ju s t ed b as i s i n th e Fi refl y- 7
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[* 7 ] o f ju s to v er $ 1 .6 m i l l i o n o n h i s 2 0 0 5 retu rn , wh ich g en erat eda n earl y $ 8 2 ,0 0 0 d ep reci at i o n d edu ct i o n fo r th aty ear al o n e. In t o t al Ku rd zi el rep o rt ed$ 1 2 9,2 3 0 i n t o t al ex p en s es rel at edt o the Fi refl y , an d$ 1 1 5,2 8 0 i n b u s i n es s l o s s --an am o u n t wh i ch redu cedKu rd zi el ’ s t ax ab l e i nco m e fro m o ther s ou rces b y

m o re t h an h al f. Si m i l ar Sch edu l es C were p ro du cedi n s ub s equ en t t ax y ears o n wh i ch Ku rd zi el cl ai m edo v er $ 8 0 , 0 0 0 i n d ep reci at i o n d edu ct i o n s an d s ix -fi g ure n etl os s es th at g reat l y o ffs eth i s i n co m e. Th e Fi refl y

co nt i n u edi t s ai rs h o w ap p earan ces an db ro u g h t i n s o m e i n co m e i n m o s ty ears , b u tthi s i n co m e n ev er cam e cl o s e t o co v eri n g ev en Ku rd zi el ’ s o u t o f-p o ck etco s t s . An drem em b er Ku rd zi el ’ s i n i t i al p l an t o earn m o n ey b y s el l i n g ri des ? W el l , h e s o o n l earn edth atth i s was a l eg al i m p o s s i b i li ty

du e t o FAA reg u l at i o n s , an di t rem ai n edl eg al l y i m p o ss i b l e fo r al l th e y ears ati s su e i n th es e
cas es . Kurd zi el wo u l d , h o wev er, s t i l l g i v e free ri d es as th ey “ are i n v al u ab l e fo r p res s * * * [an d ] th e ex p o s ure[] .” Ku rd zi el ’ s l o s s es as s o ci at edwi th th e Fi refl y i ncreas edwi th each y ear at i s su e. Here’ s a t ab l e:- 8
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[* 8] 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 Dep reci at i o n $8 2 ,8 0 2 $8 3 ,9 0 3 $ 8 5 ,0 7 7 $8 6 ,2 5 0 In su ran ce 1 1 ,9 7 6 1 6 ,3 0 0 1 6 ,3 0 0 1 6 ,3 0 0 Leg al an d p ro fes s i o n al s erv i ces 2 5 0 5 0 0 2 ,9 5 8 6 0 0 Offi ce ex p en se 3 0 1 6 8 -0 - -0 - Ren t 1 0 ,8 0 0 1 0 ,8 0 0 1 1 ,4 9 3 1 2 ,5 2 6 Rep ai rs an d m ai n t en an ce 5 ,5 3 4 5 4 0 1 ,3 2 2 1 ,1 9 1 Sup p li es -0 - -0 - 9 7 1 5 Tax es an dl i cen s es 2 0 0 1 2 5 -0 - -0 - Trav el , m eal s, an d en t ert ai n m en t 1 ,9 1 7 1 ,2 4 2 2 ,7 6 6 1 ,2 9 2 Oth er ex p en s es 1 1 3 ,3 1 7 1 9 ,6 8 7 1 6 ,0 2 0 1 1 ,4 8 0 To t al ex pen s es 12 6 ,8 2 6 13 3 ,2 6 5 1 3 6 ,0 3 3 12 9 ,6 5 4 In co m e 9 ,6 8 5 1 4 ,4 0 0 1 4 ,0 0 0 -0 - Netl os s (1 1 7 ,1 4 1 ) (1 1 8 ,8 6 5 ) (1 22 ,0 3 3 ) (1 2 9 ,6 5 4 ) An dh ere’ s an ot h er t o s h o w h o w Ku rd zi el ’ s Sch edul es C n et l o s ses redu cedh i s i n co m e fro m

o th er s o u rces :

1 “ O th er ex pen s es ” l i s t edo n Ku rd zi el ’ s Sch edu les C i ncl u d e (1 ) an nu al i n s p ect i on , (2 ) du es an d s ub s cri p t i o n s, (3 ) ai rp l an e fu el an do i l , (4 ) web si te, (5 ) p arach u t e p ack i n g , (6 ) s up p o rtequ ip m en t , (7 ) p o s t ag e d el i very , an d (8 ) edu cat i o n.- 9
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[* 9] 20 0 7 2 00 8 2 00 9 2 0 1 0 In co m e fro m

o th er s ou rces $ 2 72 ,8 3 2 $ 15 9 ,7 3 8 $ 17 6 ,0 7 4 $ 18 7 ,0 1 5 Sch edu l e C n etl o ss es (1 1 7 ,1 4 1 ) (1 1 8 ,8 6 5 ) (1 2 2 ,0 3 3 ) (1 2 9 ,6 5 4 ) Oth er l os ses : Ren t al an do th er b u s i n es s l os s es (8 7 ,4 5 7 ) (1 0 2 ,1 5 6 ) (6 1 ,6 3 5 ) (3 9 ,3 7 9 ) Neto p erat i n g l o ss (7 7 ,6 1 7 ) (7 7 ,6 1 7 ) (7 7 ,6 1 7 ) (1 1 6 ,0 7 0 ) To t al i n co m e (9 ,3 8 3 ) (1 3 8 ,9 0 0 ) (8 5 ,2 1 1 ) (9 8 ,0 8 8 ) Du ri n g al l y ears ati s s u e Ku rd zi el n ei th er h ad a fo rm al b u s in es s p lan fo r t h e Fi refl y n o r k ep tb o o k s an dreco rd s o r s ep arat e b an kacco un t s fo r h i s Fi refl y -rel at ed act i vi t i es . He fl ew t h e Fi refl y i n ai rs h o ws u n t i l 2 0 1 2 , wh en a p artfai l edan di t
cras hedwh i l e l an d i n g . Ku rd zi el co n t i n u es t o wo rk o n i t s rep ai r. C. Ai rwo rl d LLC, Et c. On e u n u s u al as p ecto f t h es e cas es i s th atth e Fi refl y i s n o t Ku rd zi el ’ s o n l y p u t at i v e s i d e b u si n es s . In2 0 0 6 h e fo rm eda fl i g h t-t rai n i n g b u si n es s n am ed Ai rwo rl dLLC. He d idn o ttran s fer t h e Fi refl y t o th i s LLC, b u ti n a way th e o l d p l an e was th e cat al y s to f thi s n ew b u s i n es s , s i nce t he Fi refl y h adb eco m e s o p o p u l ar an d “p eo p l e h a[d ] as k ed[h i m ] t o d o fl ig h ttrai n i n g.” Ku rd zi el rep o rt ed Ai rwo rl d ’ s o p erat i o n s o n Sch edu l es E, Sup p l em en t al In co m e an dLo ss , o f h i s- 1 0 -

[* 1 0 ] 2 0 0 7 th ro ug h 2 0 0 9 i n co m e t ax return s , an d t h e Co m m is s i o n er al l o wedal l th e l o s s es th ath e cl ai m ed
. Ku rd zi el al s o h ado th er ai rp l an e-b as edv en tu res --t he Ai rb o rn e Tact ical Ad v an t ag e Co rp o rat i o n (ATAC) an d St ri k e Un i v ers i ty , an o ffs h o ot o f Ai rwo rl d
. Al th o u g h i ti s n o l o n g er affi l i at ed , h e s t art edATAC aro u n d1 9 9 4 wi th th ree o th ers t o p ro v i d e t act i cal ai rb o rn e t rai n i n g . “ Fo r th e l as t2 0 y ears , Ai rb o rn e Tact i cal Ad v an t ag e Co m

p an y * * * h as trai n edNav y , M ari ne, Ai r Fo rce an dArm y ai rcrews , s h i p -crews , an dCo m b atCo n tro l l ers .” ATAC, Th e Co m p an y , h t tp : // at acu s a.co m

/ at ac_ co m

pan y .h t m l (l as t v is i t edFeb . 7 , 2 0 1 9 ). St ri k e Un i vers it y

i s “ a co n cep t* * * i t ’ s g o i n g t o b e a l ead ers h i p s ch o o l” wi th “ v ery b ro adap p l i cat i o n s t o an y k i n d o f h i g h -ri s ki ndu s try --m ed i ci n e, ai rl in es , o i l an d g as , [an d ] m i n i n g .” Nei th er i t n o r ATAC p ro du cedan y o f t h e i t em s th atrem ai n i n d i s p u t e i n ei th er o f t h es e cas es . II. Au d it , Pet i ti o n , an dTri al Sch edu l es C wi th b i g l o s s es an dl i t t l e i n co m e rarel y fl y u nd er t h e IRS’ s rad ar. Ku rd zi el recei v eda n o t i ce o f d efi ci en cy fo r t ax y ears 2 0 0 7 th ro ug h 2 0 0 9 , i n wh i ch th e Co m

m i s s i o n er d is al l o wedh i s Sch edu les C an d n eto p erat i n g l o s s (NOL)- 1 1 -

[* 1 1 ] d edu ct i o ns an dd et erm i n ed2 0 % s ect i o n 6 6 6 2 (a) 2 p en al t i es o n th e al t ern at e g ro u nd s o f n eg l ig en ce o r d i s reg ardo f ru l es o r reg ul at i o n s , s ub st an t i al
u n d ers t at em en to f i n co m e t ax , an d s ub s t an t i al v al u at i o n m i s s t at em en t . Fo l l o wi n g cl o s e b eh i n dwas a s eco n d no t i ce fo r Ku rd zi el ’ s 2 0 1 0 t ax y ear, i n wh i ch the Co m m i s s i o n er d i s al l o wedthe s am e d edu ct i o n s , p l u s a few d educt i on s o n Sch edu l e A, It em i zedDedu ct i on s , an d a l o s s o n Ku rd zi el ’ s Sch edu l e E, an db o l t edo n
an o th er s ect io n 6 6 6 2 (a) p en al ty . Kurd zi el t i m el y p et i t i o n edo u r Co u rt . Inh i s p et i t i o n h e cl ai m edth at“ th e Co m m i s s i o n er erred i n d et erm i n i n g t h atth e p et i t i o n er’ s Sch edu le C b u s i nes s * * * was n o ten g ag edi n fo r p ro fi t ” an d i n d et erm i n i n g th ath e was n o t en t i t ledt o NOL d edu ct i o n s . W e t ri edth es e cas es i n San Di eg o . 3 Attri al Ku rd zi el t es ti fi ed th ath e b o u g h tth e Fi refl y

as an i nv es t m en tan di n ten d s t o ev en tu al ly s el l i t fo r a p ro fi t
. He t es t i fi edth at th e ai rp l an e i s “ b as i cal l y [h i s ] ret i rem en t ” s i n ce h e l o s t h i s p en si o n wh en No rt hwes td ecl aredb an krup t cy . Th e Co m m i s s i o n er t h i n k s t h i s arg u m en two n ’ t fl y

b ecau s e Ku rd zi el n ev er actu al l y i n t en d edt o s el l th e p l an e; an d

2 Al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de i n effect fo r t h e y ears ati s s u e, an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an d Pro cedure, u n les s we s ay o th erwi s e. 3 Ku rd zi el l i v edi n Cal ifo rn i a atal l rel ev an t t i m es , wh i ch m ean s th es e cas es are ap p eal ab l e t o th e Ni n th Ci rcu i t . See s ec. 7 4 8 2 (b )(1 )(A).- 1 2 -

[* 1 2 ] ev eni f h e h ad , th e 2 0 1 2 cras h s i g n i fi can t l y redu cedi t s v al u e, m ak in g an y cap i t al g ai n u n l i k el y . Si m o n Bro wn , a s el l er o f W o rl d W ar II ai rcraft , t es t i fi edas an ex p ert wi tn es s th at Ku rd zi el ’ s Fi refl y i s wo rt h b et ween $ 3 .5 an d$ 5 m i l l i o n b as edi n p art
o n h i s “ v i s ual i n s p ect i o n ” o f t h e ai rp l an e an dthe fact th ath e s o l da d i fferen t(an d
u n res t o red ) Fi refl y

fo r ab ou t$ 40 0 ,0 00 . He al s o cred i b l y t es t i fi edth atu s i n g rep l acem en tp art s t o rep ai r a d am ag edp l an e wo ul dn otd ecreas e i t s v al u e, b u t fai l i n g t o k eep i ti n g o o d fl y i n g co n d i t i o n wo u l d . Ro n al dTi nkh am , an o th er
ex p eri en cedap p rai s er o f v i nt ag e m i l i t ary ai rcraft , al s o t es ti fi ed as an ex p ert wi tn es s th at Ku rd zi el ’ s Fi refl y co u l dreas o n ab l y

s el l fo r o ver $ 8 m i l l i o n . Ti n kham , h o wev er, s tres s ed th atth i s was an es t i m at e an d n o tan o ffi ci al ap p rai s al
. Al th ou g h the Co m

m i s s i o n er d et erm i n eda s ect i o n 6 6 6 2 (a) p en al ty fo r each y ear at i s s u e, attri al h e fai l edt o i n tro du ce an y ev i d en ce t h ath e’ dco m

p l iedwi t h
s ect i on 6 7 5 1 (b ). See Graev v . Co m m is s i o n er (Graev III), 1 49 T.C. 4 8 5, 4 9 3 n .1 4 (2 0 1 7) (ci t i n g Ch ai v . Co m m i s s i o ner, 8 5 1 F.3 d1 9 0 , 2 2 1 (2 dCi r. 2 0 1 7 ), aff’ g i n p art , rev ’ g i n p art T.C. M em o . 2 0 1 5 -4 2 ), s up pl em en t i n g an do verru l i ng i n p art1 4 7 T.C. 4 6 0 (2 0 1 6 ).- 1 3 -

[* 1 3 ] OPINION Aft er co n ces si o ns , we are l eftt o an swer:

• d id Ku rd zi el h av e a p ro fi tm o t i v e i n h i s u s e o f th e Fi refl y duri n g th e 2 00 7 -1 0 t ax y ears ;

• d id Ku rd zi el s ub s t an t i at e h i s cl ai m edSch edu l e C “ an n u al i n s p ect i o n ” ex p en s es i n ex ces s o f $ 6 , 4 8 8 , an dan y o f h i s co n tes t ed Sch edu l e A i t em izedd edu ct io n s fo r t h e 2 0 1 0 t ax y ear;

• d id Ku rd zi el es t ab l i s h th at h e i s en t i tl edt o NOL d edu ct i o n s fo r t h e 2 00 7 -1 0 t ax y ears ; an d

• i s Ku rd zi el l i ab l e fo r accu racy -rel at edp en al t i es fo r t ax y ears 2 0 0 7
- 1 0? W e an s wer each qu es t io n b el o w. I. Pro fi tM o t i ve Sect io n 1 6 2 (a) p erm it s d educt i o n s fo r “ o rd i n ary an dn eces s ary

ex p en s es p ai do r i n cu rred * * * in carry i n g o n an y trad e o r b us i n es s .” An ds ect i on 2 1 2 (1 )
an d (2 ) g en eral l y

al lo ws a t ax p ay er t o cl ai m a d edu ct i o n fo r al l th e o rd in ary an d
n eces s ary ex p en ses p ai do r i n cu rred“ fo r t h e p ro du ct io n o r co l l ect i o n o f i nco m e,”
an d “ fo r t h e m an ag em en t , co ns erv at io n , o r m ai n t en an ce o f p ro p ert y h el dfo r t h e p ro duct i o n o f i n co m e.” Ev en i f t h ere i s n o t rad e o r b u s i n es s , a d edu ct i o n fo r
ex p en s es rel at i n g t o i n v es t m en tact i v i t i es m ay b e al l o wab le u n d er s ect i on 2 1 2
. See, e.g
. , Th om as o n v . Co m m is s i o n er, T.C. M em o . 1 99 7 -4 8 0 , 1 9 9 7 W L 6 5 3 8 9 4 ,- 1 4 -

[* 1 4 ] at* 6 . Bu ts ect i o n 1 8 3(a) b ars t ax p ay ers fro m cl ai m i n g d edu ct i o n s fo r act i vi t i es th atare “ n o t en g ag edi n fo r p ro fi t ,” ex cep tas p ro vi dedu n d er s ect i o n 1 8 3 (b ). Th e t es to f p ro fi tm o t i v e i s a s ub j ect i ve o n e--a t ax p ay er m u sts h o w th ath e
u n d ert o o kth e ch al l en g edact i v i ty wi th an “ actu al an dh o nes to b j ect i v e o f m ak i n g a p ro fi t.” See Drei cer v . Co m m i s s i o n er, 7 8 T.C. 6 4 2 , 6 4 5 (1 9 8 2 ), aff’ dwi th o u t p ub l i s h edo p i n i o n, 7 0 2 F.2 d1 2 0 5 (D.C. Ci r. 1 9 8 3 ). Hi s ex pect at i o n o f a p ro fi t d o es n’ th av e t o b e reas o n ab l e, b u ti tm u s tb e g en ui n e. See s ec. 1 .1 8 3 -2 (a), In co m e Tax Reg s . (“ i t m ay

b e s u ffi ci en tth atthere i s a s m al l ch an ce o f m ak in g a l arg e p ro fi t.”); s ee al s o El l i o t tv . Co m m i s s i on er, 9 0 T.C. 9 6 0 , 9 7 0 (1 9 8 8), aff’ dwi th o u t p ub l i s h edo p i n i o n, 8 9 9 F.2 d1 8 (9 th Ci r. 1 9 9 0). An da t ax p ay er b ears th e b u rd en
o f p ro v i n g h i s m o t i v e, wh i ch m u s tb e t o m ak e aneco n o m i c p ro fi tan d n o t ju s tcu t h i s t ax b i l l . W o lf v . Co m m i s si o n er, 4 F.3 d 7 0 9 , 7 1 3 (9 th Ci r. 1 9 9 3 ), aff’ g T.C. M em o. 1 9 9 1 -2 1 2
. Inth e Ni n th Ci rcu i t , th e i n t en tt o m ak e a p ro fi tm us tal s o b e t h e p red o m i n an t , p ri m ary , o r p ri n ci p al m o t i v e. Id
. Di dKu rd zi el i nt en d to m ak e a p ro fi twi th th e Fi refl y ? Th e reg u l at i o n s g i v e
u s s o m e d i rect i o n . Th ey

s ay t o u s e “ o b

ject i v e s t an d ard s ” t o d i s cern a t ax p ay er’ s i n t en t , “ t ak i n g i nt o acco u n tal l o f t h e fact s an d ci rcu m s t an ces .” Sec. 1 .1 8 3-2 (a), In co m e Tax Reg s . Th ey

g i v e u s n i n e fact o rs t o co n s i d er, wi th “ [n ] o o n e fact o r- 1 5 -

[* 1 5 ] [b ei n g ] d et erm in at i v e.” Id . p ara. (b ). Th ey t el l u s th atwe can l oo kato th er fact ors n o to n th e l is tan dth atwe s h o u ldn o t m ak e a d et erm i n at i o n b as ed o n th e
n u m b er o f fact o rs i n d i cat i n g a l acko f p ro fi tm o t i v e an d “ v i ce v ers a.” Id . Th e Sev en th Ci rcu ith as cal l edth i s o p en -en dedt es to f o b ject i ve fact o rs o f s ub

ject i v e i n t en t“ g oo fy ”, an d h as ch o s enn o tt o “ wad [e] th ro u g h th e n in e fact o rs ” b u ti n s t ead t o t ak e a m o re h o l i s t i c ap p ro ach . Ro b ert s v . Co m m i s s io n er, 8 2 0 F.3 d2 4 7 , 2 5 0 , 2 5 4 (7 th Ci r. 2 0 16 ), rev ’ g T.C. M em o . 2 0 1 4-7 4
. Th es e cas es , h o wev er, are ap p eal ab l e t o th e Ni n th Ci rcu i t , an d s o t h e n i n efact or t es ti ti s . Here t hey are:

• th e m an n er i n wh i ch th e t ax p ay er carri es o n the act i v i ty ;

• th e ex pert i s e o f t h e t ax p ay er o r h i s ad vi s o rs ;

• th e t i m e an deffo rtex p en d edb y th e t ax p ay er i n carry i n g o n th e act i v i ty ;

• th e ex pect at io n t h atas s et s u sedi n th e act i v i ty m ay ap p reci at e i n v al ue;

• th e s ucces s o f t he t ax p ay er i n carry i ng o n o th er s i m i l ar o r d i ss i m i l ar act i v i t i es ;

• th e t ax p ay er’ s h i s t o ry o f i n co m e o r l o s s es wi th res p ectt o th e act i v i t y ;

• th e am o u nto f p ro fi t s earn ed , i f an y ;

• th e fi n an ci al s t atu s o f t h e t ax pay er; an d- 1 6 -

[* 1 6 ] • an y

el em en t s o f p ers o n al p l eas u re o r recreat io n . Sec. 1 .1 8 3 -2 (b ), In co m e Tax Reg s . A. M an n er i n Wh ich th e Act i v i ty Is Co ndu ct ed Th e fi rs tfact o r h as u s l o o kath o w th e t ax p ay er carri es o n th e act i v i ty . It t el l s u s th atcarry i n g o n t he act i v i ty i n a “ bu s in es s l i k e m an n er” an d“ m ai n t ai n [i n g ]
co m p l et e an daccu rat e b o o k s an dreco rd s ” co u l di n d i cat e a p ro fi tm o ti v e. Sec. 1 .1 83 -2 (b )(1 ), In co m e Tax Reg s . Kurd zi el h adn o fo rm al b u s i nes s p l anfo r t h e Fi refl y , an dm ai n t ai n edn ei th er s ep arat e fi n an ci al b o o k s an dreco rd s n o r s ep arat e b an k acco u n t s . He h ada s p read s h eetwi th th e p ro ject edex p en s es an d“ cas h fl o w” fro m s el l i n g ai rp l an e ri d es . He al s o h ad d o cu m en t s l ab el ed“ Fi refl y LLC Bu s i n es s Pl an ,” “ Fi refl y

LLC Bu si n es s p l an fo r Ap r 2 0 0 2 ,” an d “ Fi refl y Yearl y Op erat i n g Ex p en s e Pro

ject ed ,” wh i ch s t at e h i s i n t en tt o res t o re t h e Fi refl y , en t er i ti n ai rs ho ws , an dai d th e Ro y al Au s t ral i an Nav y “ i n th e res t o rat i o n o f t hei r [s i c] Fi refl y t o fl y ab l e co n d it i o n .” Th i s ai d wo u l di n tu rn“ creat e m o re awaren es s ” o f h i s o wnFi refl y

an d “ i ncreas e i t s m ark et ab i li ty .” W e fi n d th es e d o cu m en t s l es s a b u s i n es s p l an an dm o re a s u m m ary o f Ku rd zi el ’ s i n t en t o r h op e. See Kn o wl es v . Co m m i s s i o n er, T.C. M em o . 2 0 1 7 -1 5 2 , at* 1 5
. W e al s o can n o tb e s u re wh en Ku rd zi el creat edth es e p l an s . Th ere i s a h an dwri t t en n ot at i o n o n th e “ Fi refl y LLC- 1 7 -

[* 1 7 ] Bu s i n es s Pl an ” t h ats ay s “ Ori g i nal Pl an1 9 9 9 -2 0 0 0 ? ,” wh i ch t en d s t o s h o w th atev en i ts creat or was u n s u re. Th e o th er d ocu m en t s d o n o tco n tai n d at es . W e d o b el i ev e Ku rd zi el ’ s cl ai m th ath i s o ri g i n al p l an was t o s el l ri d es o n th e Fi refl y , b u taft er h e l earn edth is was i m p o ss i b l e h e d id n’ tch an g e h i s p lan s “ wi t h
an i n t en tt o i m

p ro v e p ro fi t ab il i ty .” Sec. 1 .1 8 3 -2 (b )(1 ), In co m e Tax Reg s. He i n tro du ceda o n e-p ag e d ocu m en tt i t l ed“ Fi refl y LLC Bu s i n es s Pl anUp d at e” wi t h a h an dwri t t en “ 2 0 0 5 ” atth e t op . Th i s up dat e i n v o l v ed h i s p l an t o u s e t h e Fi refl y i n b o th Ai rwo rl d an d St ri k e Un i v ers i ty , wi th St ri k e Un i v ers i ty “ ju s ts t art [i n g ] ” i n 2 0 1 6 . Bu tKu rd zi el d i dn ’ tcl ari fy h o w h i s p u rp o rt ed2 0 0 5 up d at e i n cl u d eda p ro ject th atd i dn ’ t s t artu n t i l 2 0 1 6 , wh i ch l ead s u s t o d o ub tth ath e d raft edi tb ack i n 2 0 0 5. Ag ai n s tth i s cl o se read i n g o f Ku rd zi el ’ s p ri vat e d o cu m en t s are t h e cl ai m s h e
m ad e i n p ub l i c fi l i n g s t o ach i ev e a l o cal p ro p ert y -t ax ex em p t i o n fo r t h e Fi refl y . In th o s e fi l i n g s h e as s ert ed th at h e was n ei ther u si n g the Fi refl y fo r co m m erci al p u rp os es n o r h o l d i ng i t fo r s al e. Wh at ’ s m o re, co n si deri n g th atKu rd zi el cl ai m s th ats el l i n g th e Fi refl y

h as b een p arto f h is p l anal l al on g , we fi n d i to d dth ath e d i d
n o th av e an ap p rai sal d o n e u n t i l 2 0 1 4 --ev en th o u g h h e res t o redth e Fi refl y i n 2 0 0 2
. Th i s fact o r wei g h s ag ai n s tKu rd zi el
.- 1 8 -

[* 1 8 ] B. Ex p ert i s e o f Tax p ay ers o r Ad v i sers Th i s fact o r t el ls u s t h at“ [p ] rep arat i on fo r t h e act i v i ty b y ex t en s i v e s tu dy

o f i t s accep t edb us i n es s , eco n o m ic an d s ci en t i fi c p ract i ces ” o r co n s u l t at i on wi th
ex p ert s can s u g g es t a p ro fi tm o t i v e. Sec. 1 .1 83 -2 (b )(2 ), In co m e Tax Reg s . Wh i l e

“ a t ax p ay er n eed n ’ t m ak e a fo rm al m ark ets tud y i n p rep arat i o n fo r a t rad e o r b u s i n es s , h e’ s ex p ect edt o u n d ert ak e a b as i c i n v es t i g at i o n o f t h e fact o rs th atwo u l d affect h i s p ro fi t .” Hei nb o ck el v . Co m m is s i o n er, T.C. M em o . 2 0 1 3-1 2 5 , at* 2 4
-
* 2 5 (ci t i n g W es tb ro ok v . Co m m i s s i o n er, T.C. M em o . 1 9 9 3 -6 3 4 , 1 9 9 3 W L 5 4 0 7 8 4 , at* 7 , aff’ d , 6 8 F.3 d 8 6 8 (5 th Ci r. 1 9 9 5 )). Ku rd zi el ’ s p ro o f o f h i s ex p ert i s e i s h i s actu al res t o rat i o n o f t h e Fi refl y t o fl y ab i l i ty . W e ag ree t h atth i s s h o ws g reat ex p ert i s e--i nd eed , o n e-o f-a-k in d -i n -t h ewo rl dex pert i s e--i n ai rcraft res t o rat i on , b u tth is fact o r p o i n t s u s t o ex p ert i s e i n
m ak i n g m o n ey

fro m an act iv i ty

an dn o tju s t th e ab i l it y t o acco m pl i s h an u n u s u al l y d i ffi cu l to b

ject i v e. W e h av e fo u n d , h o wev er, t h att ech n i cal an dp ract i cal
ex p eri en ce i n a s p eci al i zedfi el dcan b e s u ffi ci en tt o m ak e th i s fact o r fal l i n fav o r
o f a t ax p ay er t o s om e d eg ree. See Bark er v . Co m m i s s i o ner, T.C. M em o . 2 0 1 2 -7 7 , 2 0 1 2 W L 9 4 7 1 3 4 , at * 5 (ch o o s i n g n o tt o qu es t io n t ax p ay er’ s ex p ert i s e i n
en g in eeri n g o r kn o w l ed g e o f s p ace ex p l orat i o n t ech n o l o g y g i v en h i s ad v an ced d eg rees an dcareer). Th e Fi refl y ’ s res t o rat i on was a h u g e u n dert ak i n g th at n o i l l

-- 1 9 -

[* 1 9 ] p rep aredp ers o n co u l dp u l l o ff. What ’ s m o re, Ku rd zi el , as b o th an en g i n eer
an d an ex p eri en cedp i l o t , d es i g n edm an y o f t he p art s o n th e Fi refl y h i m s el f. Th i s
s h o ws th ath e kn ew wh ath e was d o i n g t ech ni cal l y . He h as al s o b een aro u n d ai rp l an es fo r 4 5 y ears an ds eem s t o h av e h adan i n t eres t i n warb i rd s s i n ce atl eas t 1 9 9 3 --wh i ch i s wh en h e t es t i fi edth ath e fi rs t s aw th e Fi refl y . Onth e o th er h an d , we h av e fo u n di n a n u m b er o f cas es th atan ex p ert ’ s kn o wl ed g e o f an act i v i ty

al on e i s i ns u ffi ci en twh en h e fai l ed t o co n du ctres earch
o r s eekad v i ce o n i t s b u si n es s as p ect s an dp ro fi t ab i li ty . See, e.g
. , Bet t s v . Co m m i s s i o n er, T.C. M em o . 2 0 1 0 -1 6 4 , 2 0 10 W L 2 9 9 0 3 00 , at* 8 . W i th o ut
s tud y i n g an act i vi ty ’ s p ract i cal eco n o m ics , m ere t ech n i cal kn o wl ed ge m ay ju s t
rev eal a s k il l edh o b b y is tan dn ota b u s i n es sm an . See Go l an ty v . Co m m i ss i o n er, 7 2 T.C. 4 1 1 , 4 3 2 (1 9 7 9 ), aff’ d , 6 4 7 F.2 d1 7 0 (9 th Ci r. 1 9 8 1 ). Th e factth at Ku rd zi el p l an n edt o s el l ri d es i n the Fi refl y wh en i th as b een i ll eg al t o d o s o th ro u g h ou th i s o wn ers hi p rai s es a redfl ag . So wh i l e Ku rd zi el i s ex trem el y
ex p eri en cedwi th ai rp l an es an dth ei r res t o rat i o n , we th in kth i s p ract i cal ex p eri en ce i s can cel edo u tb y

h i s fai l u re t o s ho w th ath e d i da b as ic i n v es t i g at i o n i n t o th e b u s i n es s as p ect s an deco n o m i cs o f v i n tag e ai rp l an e res t o rat io n . Th i s fact o r fav o rs th e Co m m i s s i o n er.- 2 0 -

[* 2 0 ] C. Ti m e an d Effo rt Ex p en d edo n th e Act i v i ty

“ Th e fact th atth e t ax p ay er d ev o tes m uch o f h i s p ers o n al t i m e an deffo rtt o carry i n g o n an act i v i ty , p art i cu l arl y i f t h e act i vi ty

d o es n o th av e s ub s tan t ial p ers o n al o r recreat i o n al as p ect s, m ay i n d i cat e an i n t en ti o n t o d eri v e a p ro fi t .” Sec. 1 .1 83 -2 (b )(3 ), In co m e Tax Reg s . An da t ax p ay er’ s ch o i ce t o l eav e an o th er jo b t o
s p en d m o s to f h is t i m e o n th e act i vi ty m ay fu rth er ev i d en ce h i s i n t en ti o n t o tu rn a p ro fi t. See i d .; s ee al s o M et z v . Co m m is s io n er, T.C. M em o . 2 0 1 5-5 4 , at* 4 6 -* 4 7 (t ax p ay ers ’ h o rs e-b reed i n g b u s i n es s was a fu l l -t i m e act i v i ty ). Th ere i s n o d o ub t th atKu rd zi el d ev o t eda s i gn i fi can tam o u n to f t i m e t o th e Fi refl y , fro m res t o rat i o n
an d m ai nt en an ce t o trai n i n g an dai rs h o ws . He trav el edt o th e res t o rat i o n s i t e i n Co l orad o “ twi ce a m o n th fo r ei g h ty ears ” an d al s o l o gg ed th o u s an d s o f h o u rs
wo rk i n g o n an dfl y in g the Fi refl y i n 2 0 0 7 , 2 0 08 , an d 2 0 0 9
. Bu tKu rd zi el ’ s wo rk o n th e Fi refl y h ad “ s ub s t an t i al p ers o n al o r recreat i o nal
as p ect s ,” s ee Do d g e v . Co m m i s s i o n er, T.C. M em o . 1 9 9 8-8 9 , 1 9 9 8 W L 8 8 1 7 5 , at
* 5 -* 6 , aff’ dwi th o u t p ub li s h edo p i n i o n , 1 8 8 F.3 d5 0 7 (6 th Ci r. 1 99 9 ) (s k il l ed ri ders p u ti n a g reat d eal o f t i m e t o h o rs e-b reed i n g act i v i ty b u tal s o d eri v eda
s ub s t an t i al recreat i o n al b en efi t ), ev en g i v en th e wo rkas s o ci at edwi th i t , s ee Gi l es
v . Co m m i s s i o n er, T.C. M em o . 2 0 0 6 -1 5 , 2 0 0 6 W L 2 37 5 0 3 , at* 1 3 (u np l eas an t t as k s are o ft en as s o ci at edwi th a h o b b y ). M an y o f t h e h o urs th atKu rd zi el l o g g ed- 2 1 -

[* 2 1 ] were fo r p ers o n al t i m e s p en tu s i n g the Fi refl y . He al s o ad m i tt ed thatth e Fi refl y was a g reat acco m

p l i sh m en tfo r h i m

an dth ath e g et s a “ trem en d ou s am o u n t
o f s at i sfact i o n ” fro m fl y i n g i t . Th at ’ s n o tt o s ay o n e can ’ tex p eri en ce s at i s fact i o n fro m p ro fi tab l e wo rk , s ee J ack s o n v . Co m m is s i o n er, 5 9 T.C. 3 1 2 , 3 17 (1 9 7 2 ), b u t b ecau s e Kurd zi el rem ai n ed a fu l l -t i m e em pl o y ee o f Del ta, we t h i n kth e g reat
am ou n to f t i m e, en erg y , an d m o n ey th ath e p u ti n t o th e Fi refl y i s m o re t h e res u l to f
an em o t io n al at t ach m en t th an a b u s i n es s , s ee Bal l ich v . Co m m i s s i o n er, T.C. M em o. 1 9 7 8 -4 9 7
. Th i s fact o r i s n eu tral
. D. Su cces s i n Carry i n g OnOth er Si m i lar Act i v i ti es A t ax p ay er’ s p rev i o u s s u cces s i n s i m i lar act i v i t i es m ay s h o wthath e h as a p ro fi t o b ject iv e, ev en i f t he act i v i ty i s cu rren t l y

u npro fi tab l e. See s ec. 1 .1 8 3
- 2 (b )(5 ), In co m e Tax Reg s . Th ere’ s n o ev i den ce h ere, h o wev er, th atKu rd zi el was p rev i o u s l y s ucces s fu l i n res t o ri n g ai rp l an es an ds el l i n g th em fo r p ro fi t . Kurd zi el p o i n t s t o h i s p as tan ds ub s equ en treal -es t at e i n ves t m en t s as p ro o f o f h i s s u cces s i n h i s t o ri c-ai rp l an e res t orat i o n . He s ay s th ath e earn edth e m o n ey t o b u y th e Fi refl y b y b u y in g Cal i fo rn i a p ro p ert y an d “ w at ch i n g th e v al u es i n creas e.” W e ack n owl ed ge t h at b o th th es e act i v i t i es i nv o lv e t h e reas o n ab l e h o p e o f ap preci at i o n i n as s etv al u es , b u t d o n ’ t fi n dth e l i n kb et ween h is t o ri c-ai rp l an e res t o rat i o n an d- 2 2 -

[* 2 2 ] real -es t at e res al e s o s i m p l e. An dKu rd zi el ’ s m o re recen ti n ves t m en t s are
s t il l u n cert ai n , wi th o n l y

an ex p ect at i o n o f p ro fi t
. Th i s u n cert ai n ty i s i n fact th e
o n l y s i m i l ari ty

t o h is Fi refl y

i n v es t m en t , wi th n ei th er y eta s ure fi n an ci al s ucces s . Th i s fact o r fav o rs th e Co m m i s s i o n er. E. Hi s t o ry

o f In co m e o r Lo s s A s eri es o f l o s s es du ri n g th e s t artup s tag e o f an act i vi ty m ay n ot n eces s ari l y i n d i cat e t h atan act i v i ty

i s n o ten g ag edi n fo r p ro fi t. See s ec. 1 .1 8 3 -2 (b )(6 ), In co m e Tax Reg s . “ Ho wev er, wh ere l o s s es co n t i n u e t o b e s u s t ai n edb ey o ndth e p eri o dwh i ch cu s t o m ari l y i s n eces s ary

t o b ri n g t h e o p erat i o n t o p ro fi t ab l e s t atu s ,” l o s s es m ay i nd i cat e t h atth e act i v i ty was n o tu n d ert ak en fo r p ro fi t . Id . Kurd zi el rep o rt edl o s ses fro m

h is Fi refl y -rel at edact i vi t i es b eg i nn i n g i n 2 0 0 5, an dth o s e l o s s es co n t i n u edth ro u g h th e 2 00 7 -1 0 t ax y ears ati s s u e. W i th each p as s in g y ear h i s Fi refl y -rel at edl o s s es o n l y i n creas ed , an dth ey

i n creas edev en wh en o ne
co n si d ers o n l y

cas h o u t l ay s . W e b el i ev e th es e l os s es co nt i n u edl on g er t h an th ey
s h o u ldh av e. Ku rd zi el co m p l et edthe Fi refl y ’ s res t o rat i o n i n 2 00 2 an dwo n h i s
m o stp res t i g io us award s th ats am e y ear. If Ku rd zi el was i nt eres t edi n m ak i n g a p ro fi t (an dcu tt i ng h i s l o s s es ), h e wo u l dh av e s o l d , o r at l eas tat t em p t eda s al e
m u ch s o o n er--es p eci al l y

aft er h e l earn edth atm o n et i zi n g ri d es was i m p o s si b l e. Th i s fact o r fav o rs th e Co m m i s s i o n er.- 2 3 -

[* 2 3 ] F. Am o u n t o f Occas i o n al Pro fi t s , i f An y Occas i o nal p ro fi t s can s ho w a p ro fi tm o ti v e, b u tth e s i ze an dfreq u en cy o f p ro fi ts rel at i v e t o l o s ses are wh atm at ter. See s ec. 1
. 1 83 -2 (b )(7 ), In co m e Tax Reg s. An d“ [a] n o ccas i on al s m al l p ro fi tfro m an act i v i ty

g en erat i n g l arg e l o s s es , o r fro m an act iv it y

i n wh i ch th e t ax p ay er h as m ad e a l arg e i n v es tm en t , wo u l dn o t g en eral l y b e d et erm i n at i v e t h atth e act i v i ty i s en g ag edi n fo r p ro fi t .” Id
. Ku rd zi el ’ s i n co m e fro m

h i s Fi refl y -rel at edact i v i t i es i s s o l el y at tri b u t ab l e t o th e

“ o ccas i o n al ” an d “ sm al l ” p aym en t s h e recei vedfro m h i s ai rs h o wap p earan ces . Th es e p aym en t s n ev er ex ceed edev en h i s i n s u ran ce co s t s , an d n o th in g i n th e
reco rdh i n t s atth e way

th e Fi refl y

co u l dev er b eco m e a p ro fi t ab l e o p erat i n g b u s i n es s . Th i s fact o r fav o rs th e Co m m i s s i o n er. G. Tax p ay er’ s Fi nan ci al St atu s A t ax p ay er’ s l acko f “ s ub s t an t ial i n co m e o r cap it al fro m s o u rces o th er t h an th e act i v i ty

[at i s s u e] m ay i n d i cat e t h at [t h e] act i v i ty i s en g ag edi n fo r p ro fi t .” Sec. 1 .1 83 -2 (b )(8 ), In co m e Tax Reg s . Kurd zi el cl ai m s th atb ecau s e h i s ret i rem en t
s av i n g s s u ffered wh en No rt h wes tm erg edwi th Del t a, an db ecau s e t h e v al u e o f t h e Fi refl y “ m ak es h i m

a m i l l io n ai re,” h i s Fi refl y act i v i ti es s ho u l db e s een as h i s m ai n
s o u rce o f i nco m e. Bu tev en as s u m i n g h i s ret i rem en ts av i n g s s u ffered , we can n o t- 2 4 -

[* 2 4 ] i g n o re t h e fact th ath e recei v edret i rem en tp ay fro m th e U.S. Nav y

an da
s ub s t an t i al av erag e an nu al i n co m e o f o ver $ 18 0 ,0 0 0 fro m Del t a duri n g th e y ears at i s su e. Ku rd zi el ’ s Fi refl y -rel at edact i v i t i es n ev er p ro duced a p ro fi tdu ri n g an y o f th e y ears ati s s u e, an dh is l o s s es i n creas edeach y ear. W e fi n d i tm o re l i k el y th an
n o tth atKu rd zi el h adco m e t o u s e t h e Fi refl y n o tas a s o u rce o f i n co m e, b u trat h er
as a way t o s i g n i fi can t l y

redu ce h i s t ax ab l e i n co m e fro m o th er s o u rces . See Ro wd en v . Co m

m i s s i o n er, T.C. M em o . 2 0 09 -4 1 , 2 0 0 9 W L 4 1 5 6 0 1 , at* 7 (“ Sub s t an t i al i n co m e fro m s o u rces o th er t han th e act i v i ty (es p eci al l y i f t he l o s s es fro m th e act iv it y

g en erat e s ub s t an t i al t ax b en efi t s ) m ay i n d i cat e a l acko f p ro fi t
m o ti v e”). Th i s fact o r wei g h s h eav i l y i n fav o r o f t h e Co m

m i s s i o n er. H. El em en t s o f Pers o n al Pl eas u re o r Recreat i o n

“ Th e p res en ce o f p ers o n al m o t i v es i n carry i n g o n o f anact i vi ty m ay i n d i cat e th atth e act i v it y

i s n o ten g ag ed i n fo r p ro fi t , es p eci al l y wh ere t h ere are recreat i o nal
o r p ers o n al el em en t s i n v o l v ed .” Sec. 1 .1 8 3 -2 (b )(9 ), In co m e Tax Reg s . Kurd zi el
co n ten d s t h atwh i l e fl y i n g an dwo rk in g o n th e Fi refl y i s s at i s fy in g , i ti s a “ fu l l

t i m e jo b ” t h at“ t ak es ev eryth i n g y o uh av e.” Bu tm an y h o b b i es can t ak e a l o to f t i m e an den erg y wh i l e s t i ll b ei n g m o st l y a s o urce o f p ers o n al recreat i o n . See Bet t s , 2 0 1 0 W L 2 99 0 3 0 0, at* 9 . An dwe h av e fo u nda fo r-p ro fi tact i v it y ev en- 2 5 -

[* 2 5 ] wh ere t h e t ax p ay er cl earl y en jo y s wh ath e i s d o i n g b u tl i m i t s h i s p ers o n al
u s e o f b us i n es s as set s. See Pry o r v . Co m m i ss i on er, T.C. M em o . 1 99 1 -1 0 9 (t ax p ay er “ cl earl y

en jo y [ed ] sai l i n g ” b u t l i m i t ed h i s p ers o n al u s e o f h i s b o att o ju s t fi ve d ay s du ri n g th e y ears ati s su e); s ee al so Di ck so n v . Co m m i s s io n er, T.C. M em o. 1 9 8 3 -7 2 3 (t ax p ay er g reat l y en jo y eds ai l i n g b u to n l y

d i ds o 7 t o 1 0 t i m es du ri n g th e y ears ati s su e). Ku rd zi el o ffered ev id en ce o f h is “p ers o n al h o u rs s p en t ” wi th th e Fi refl y

(b o th wo rk i n g o n i tan dfl y in g i t ) du ri n g 2 0 0 7-0 9 --1 ,2 0 0
. 5 h o u rs i n 2 0 0 7, 1 ,0 4 1 .5 h o urs i n 2 0 08 , an d5 4 4 .5 h ou rs i n 2 00 9
. Bey o n d th i s , we ag ree wi th th e Co m m i ss i o ner t h atth e Fi refl y b ro u g ht Ku rd zi el a g o o dd eal o f fam e an db ecam e cl os el y l i n k edt o h i s s oci al l i fe. He g o t a t rem en d o u s am o u n to f s at i s fact i o n fro m fl y i n g the Fi refl y , s ho wi n g o ff i t s
res t orat i o n , an d b ei n g t h e o n l y p ers o n i n th e co u n try qu al i fi edt o fl y

i t
. Th i s fact o r fav o rs th e Co m m i s s i o n er. I. Ex p ect at i on Th atAs s et s Us edi n Act iv i ty M ay Ap p reci at e i n Val u e Anex p ect at i o n th atas s et s wi l l ap preci at e i n v al u e can s u g ges ta p ro fi t
m o ti v e ev en i f t he t ax p ay er d eri v es n o p ro fi tfro m h i s cu rren to p erat i o ns . See s ec. 1 .1 83 -2 (b )(4 ), In co m e Tax Reg s . Bu tb efo re d et erm i n i n g wh et h er a t ax pay er
ex p ect edh i s as s et s t o ap p reci at e i n v al ue, we m u s tfi rs td et erm i n e wh et h er t h e
as s et s i n ques t i o n are p arto f t h e act i v i ty ati s s u e. See s ec. 1 .1 8 3-1 (d )(1 ), In co m e- 2 6 -

[* 2 6 ] Tax Reg s .; s ee al s o En g d ah l v . Co m m i ss i o ner, 7 2 T.C. 6 5 9 , 6 6 8 n . 4 (1 9 7 9 ) (h o l d i n g th atl an dan d h o rs e-rel at edact i v it i es were a s i ng l e act i v i ty fo r p urp o s es
o f d et erm i ni n g ap p reci at i o n o f as s et s u n d er s ect i o n 1 .1 8 3-2 (b )(4 ), In co m e Tax Reg s.). Nei ther p art y

s p eci fi cal l y

ad dres s edwh et h er Ku rd zi el ’ s o wn ers h i p o f t h e Fi refl y as an i n v es t m en ti s s ep arat e fro m h i s ai rs h ow act i v i t i es . Bu tas far as we
can t el l , th e ai rs ho ws --i f at t en d edwi th a p ro fi t m o t i v e atal l --were real ly ju s ta way t o s h o wcas e t h e Fi refl y ; h e d i dn ’ tg o t o them p ri m ari ly fo r t h e rel at i v el y

s m al l ap p earan ce fees
. Ku rd zi el ev en t es ti fi ed thath i s g o al i n at t en d i n g t h es e s h o ws
was t o i n creas e t h e Fi refl y ’ s v al u e. Its eem s t o u s th atKu rd zi el ’ s o n l y reas o n ab l e ch an ce o f m ak i ng a p ro fi twas t o h o l dth e Fi refl y i n h op es th at i t s v al ue wo u l d i n creas e b efo re s al e. So we’ l l co n s i d er h i s h o l di n g the Fi refl y an ds h o wi n g i tat
ex h ib i t i o ns as a s i n g le act i v i ty u n d er s ect i o n 1 8 3 b ecau s e o f th ei r n earl y i n ex tri cab l e “ o rg an izat i o nal an deco n o m i c i nt errel at i o ns h ip .” Sec. 1 .1 8 3 -1 (d )(1 ), In co m e Tax Reg s . W e can i nfer a p ro fi t m o t i v e h ere o n l y i f Ku rd zi el ex p ect edth at th e Fi refl y ’ s ap p reci at i o n wo u l dex ceed i t s o p erat i n g ex p en s es , s u ch th atth e ev en tu al g ai n o n
s al e wo u ldal l o w h im

t o reco up h i s l o s s es . See Bro n s o n v . Co m m i s s i o ner, T.C. M em o. 2 0 1 2 -1 7 , 2 0 1 2 W L 1 29 8 0 3 , at* 8 , aff’ d , 5 9 1 F. Ap p ’ x 6 2 5 (9 th Ci r.- 2 7 -

[* 2 7 ] 2 0 1 5 ); s ec. 1 .1 83 -2 (b )(4 ), In co m e Tax Reg s. Attri al th e l o wes tv al u es p res en t edb y

Ku rd zi el ’ s ex p ert s were $ 3 .5 m i l l i o n an d$ 8 m i l l i o n , res p ect i v el y , p ro v id edth atth e Fi refl y

was k ep t“ in ex cel l en t fl y i n g co n d it i on .” Bo th ex p ert s al s o b el i ev edth atv i n t ag e ai rcraft s were o n ly i n creas i n g i n v al u e. On e ev en s o l d a Fi refl y i n p reres t o rat io n co n d i t i o n fo r n earl y $ 4 0 0 ,0 0 0 i n 2 0 1 3 an d t es t i fi edth ati t
wo u l dt ak e $ 4 t o $ 5 m i l l i on m o re t o g eti ti n th e co n d i t i o n o f Ku rd zi el ’ s Fi refl y . An dwh i le o n e ex p ertd id n’ tth i n kKu rd zi el ’ s u s e o f “ rep l acem en tp art s ” t o rep ai r th e Fi refl y

aft er i t s 2 01 2 cras h wo u l dm at eri al ly affect i t s v al u e, b ot h ex p ert s t es t i fi edth atp l an es d et eri o rat e an dl o se v al u e rap i d l y i f t h ey are n o tfl o wn reg u l arl y . Th e Co m m is s i o n er em

p h as i zedth atth e Fi refl y

b ecam e u n ai rwo rt h y

i n 2 0 1 2 aft er i t s cras h an drem ai nedg ro u n d edatth e t i m e o f t ri al . Th at m ean s thatth e Fi refl y was g ro un dedfo r ro u g hl y fo u r y ears , duri n g wh i ch t i m e i ts v al u e p ro b ab l y d ecreas eds i gn i fi can tl y . Duri n g th e y ears ati s s u e, h o wev er, t he Fi refl y h adn o ty et
cras hedan dwas ai rwo rth y , l ik el y p l aci n g i twi thi n th e ex pert s ’ $ 3 .5 t o $ 8 m i l l i o n b al l p ark . So wh i le Ku rd zi el d i dn o th av e t h e Fi refl y ap p rai seddu ri n g th i s t i m e, we t h in kh e was aware o f i t s i n creas i ng v al u e b ecau s e o f h i s ex p o s u re t o ex p ert s i n th e v i n t ag e-warcraft fi el d an d t h e n earl y $ 1 .9 m i l l i o n h e p u t i n to i t s res to rat i o n .- 2 8 -

[* 2 8 ] W e t h erefo re fi n d t h ath e h adan ex pect at i on th at h e wo u l d co v er h i s
accu m ul at edl o s s es i f h e s o ldth e Fi refl y . Th i s fact o r fav o rs Ku rd zi el
. J
. Co n cl u si o n Ev en h av i n g co n cl u d edth atKu rd zi el ex p ect edth e Fi refl y t o ap preci at e, wh atu l t i m at el y

m at t ers i s wh et h er h e h ada g o o d -fai th p l an t o real i ze a p ro fi tfro m i t s s al e. See Bes s en y ey

v . Co m m i s s i o n er, 4 5 T.C. 2 6 1 , 2 7 4 (1 9 6 5 ), aff’ d , 3 7 9 F.2 d 2 5 2 (2 d Ci r. 1 96 7 ). W e aren ’ tco n v i n ced th ath e d i d. Th e reg u l at i o n s t el l u s th at
n o o n e fact o r i s m o re i m

p o rt an tthan an ot h er. See s ec. 1 .1 8 3 -2 (b ), In co m e Tax Reg s. Th e ex p ect at i o n th atthe Fi refl y wi l l ap p reci at e i n v al u e i s i m p o rt an th ere b ecau s e a s al e i s t h e o nl y tru e way Ku rd zi el co u ldtu rn a p ro fi t . Bu tth i s d o es n ’ t
m ak e t h e o th er fact ors l es s wei g h ty , s i n ce t o get h er t h ey s i g n al wh et h er h e ev er i n t en d edi n g oo dfai th t o m ak e a p ro fi t . An d ap p reci at i on d o es l i t t l e t o h el p Ku rd zi el ’ s cas e i f we fi n dth ath i s wo rk o n t h e Fi refl y

was p ers o nal . See Bart er v . Co m m i s s i o n er, T.C. M em o . 1 9 9 1 -1 2 4 , aff’ dwi th ou tp ub l i s h edo p i n i o n , 9 8 0 F.2 d 7 3 6 (9 th Ci r. 1 9 92 ). Ku rd zi el ’ s arg u m en tth ath e i n t en dedt o h ol dth e Fi refl y fo r i nv es t m en tal l al o n g i s co n traryt o m

u ch o f t h e ev i d en ce. Hi s b u s in es s p l an was u ncl ear fro m th e
s t art : W as h e l eas i n g th e ai rp l an e, s el l i n g ri d es o n i t , o r en t eri n g i t i n ai rs h o ws t o- 2 9 -

[* 2 9 ] p ro m o t e i t ? Ev en m o re t ro ub li n g i s th atKu rd zi el ch o se t o l i sth i s Fi refl y act i vi t i es as “ ai rp l an e l eas i n g” wh en h e n ev er o n ce l eas edth e Fi refl y o u t, an dwas aware t h ath e co ul dn ’ t l eg al l y s el l ri d es o n i t. Th i s kn o w l ed g e al s o co l o rs o u r
v i ew o f h i s earl y

b u s i n es s p l an s . W e t h erefo re d o n o tfi n dh i s up d at edp l an s t o h o l dth e Fi refl y

fo r an i n v es t m en t t o b e cred i bl e. Wh at ’ s m ore, we fi n di th ardt o b el i ev e t h atKu rd zi el i n ten d ed t o s el l th e Fi refl y al l al o n g wh en h e d i dn ’ th av e a fo rm al ap p rai s al --i f we can cal l i tth at --d o n e b efo re 2 0 14 , an d ad m i t t edo n h i s Cal i fo rn i a p ro p ert y t ax d o cu m en t s th ath e was n o t h o l d in g i tfo r s al e o r fo r p ro fi t
. Ev en fo r a co u rtl ik e t he Sev en th Ci rcu i tth atd o es n ’ ts l av is hl y fo l l o w th e reg u l at i o n ’ s fact o rs , s ee Ro b ert s , 8 2 0 F.3 dat2 5 0 , 2 5 4 , a “ h o li s ti c” ap p ro ach
wo u l dl an di n th e s am e p l ace. Gi v en th e ri sk s th atKu rd zi el ad m it tedare
as s o ci at ed wi th fl y i n g th e Fi refl y , we fi n d i ts u s p ectth at h e d i dn ’ t try t o s el l i t
. W e can reas on ab l y

s ee h i m h o ld i n g th e Fi refl y

fo r a few y ears aft er res t o rat i o n t o
en t er ai rs h o ws an di n creas e ex p o s u re. Bu tKu rd zi el d i dn ’ ts eem t o ev en th i n ko f
s el l i n g i ti n th e y ears b efo re u s , an daffi rm at i v el y rep res en t ed t o l ocal t ax
au th o ri t ies th ath e d i dn ’ t i n t en d t o d o s o . He i n s teadco n t i n u edt o h o l dth e p lan e fo r n earl y 1 5 y ears aft er i t s
res t orat i o n was co m

p l et e an di twas award edg ran dch am p i o n t it l es --a t im e wh en i t
was arg u ab l y

ati t s m o stv al u ab l e--al l wh il e u s in g th e co n s i d erab le ex pen ses o f i t s- 3 0 -

[* 3 0 ] up k eep t o o ffs eth i s s i g n i fi can to th er i n co m e. As a res u lt , a “ h ol i s t i c”
an al y s i s wo u l dreach the s am e res u l tas the ap p l i cat i o n o f t h e n o nex cl u si v e l i s to f fact ors t es t --t h e co n cl u s i o n th ati t i s m ore l i k el y th an n o t th at Ku rd zi el d i dn o t
en g ag e i n h i s Fi refl y -rel at ed act i v i ti es fo r p ro fi twi th in the m ean i n g o f s ect i o n 1 8 3. He i s th erefo re n o t en t i t l edt o d educth i s ex pen s es i n ex ces s o f g ro s s i n co m e fro m th e act i v i ty . II. Sub s t an t i at i o n Wh et h er t he Fi refl y

res t o rat i o n an d m ai n t en an ce was a p ro fi t -s eek i n g act i vi ty i s t h e b i g i s s u e, b u tth e p art i es al s o d i sp u t e wh et h er Ku rd zi el s ub s t an t i at ed cert ai n d edu ct i o n s. Th es e d is p u t edd edu ct i o n s i n cl ud e Ku rd zi el ’ s 2 0 1 0 “ an n u al i n s p ect i on ” ex p en s es l is t ed o n h i s Sch edu l e C an ds ev eral Sch edu l e A d edu ct i o n s . A. 2 01 0 Sch edu l e C An n u al In sp ect i on Ex p en ses As an al t ern at iv e t o h i s n o t -fo r-p ro fi t act i v i ty arg u m en t , th e Co m

m i s s i o n er al l o wed K

u rd zi el t o d edu ct $ 6 ,4 8 8 i n “ an n u al i ns p ect i o n ” ex p en s es fo r 2 0 1 0 b u t d i s al lo wedth e res t , arg ui ng th atthey l acka b us i n es s p u rp os e. Th e d is al l o wed
ex p en s es i n cl u de a $ 1 ,0 0 0 cas h wi th drawal thatKu rd zi el cl ai m s h e p ai dt o a fri en d, To m

Hau g , rel at i n g t o th e Fi refl y ’ s 2 0 1 0 an n u al i ns p ect io n , as wel l as s o m e
m eal an d o th er ex p en s es . Th e Co m m i s s i o ner s ay s th at Ku rd zi el fai l edt o ex p l ai n Hau g’ s rel at i o n t o th e i n s p ect i o n an dfai l ed t o i nt ro duce ev i d en ce t h atan y s u ch- 3 1 -

[* 3 1 ] p aym en t was actu al l y m ad e. He al so s ay s th atth e m eal s were n o tl i m i t edt o 5 0 % o f t h ei r co st , s ee s ec. 2 7 4 (n ), an d p oi n t s t o s ect i on 2 6 2 t o d i sal l o w th e o th er
ex p en s es as p ers o n al
. W e can b reako ff t h i s at t ackwi th th e o b serv at i on th atKu rd zi el rep o rt ed
zero g ro s s i n co m e fro m

h is Fi refl y -rel at edact i vi t i es fo r 2 0 1 0 , an dth erefo re can ’ t cl ai m an y rel at edd edu ct i o ns . See s ec. 1 8 3(b )(2 ) (l i m i t i n g d edu ct i on s fro m g ro s s i n co m e wh ere t h e d edu ct i on s ari s e fro m an act i v i ty

n o t en g ag edi n fo r p ro fi t ); s ee al s o Ki n ney

v . Co m m i s s i on er, T.C. M em o . 2 00 8 -2 8 7 , 2 0 0 8 W L 5 3 3 0 8 1 5 , at* 7 (“ Gi v en th e s ect i o n 1 8 3 (b )(2 ) l i m i t at i o n , we d o n o tn eedt o ad dres s wh et h er p et i t i o n ers s ub s t an t i at edo ther d edu ct i o n s ”). B. 2 01 0 Sch edu l e A Dedu ct i o n s Th e d edu ct i o n s i n d i sp u te o n Ku rd zi el ’ s 2 0 10 Sch edu l e A are fo r
u n rei m b u rs edem

p l o y ee b us i nes s ex p en s es rel at i n g t o h i s em p l o ym en tas an ai rl i ne p i l o t --th e co s t s o f Ku rd zi el ’ s trav el , p ers o n al v eh i cl e, an d p ark i n g --h o m e
m o rt g ag e i n t eres t , real es t at e t ax es , an dt ax p rep arat i o n fees
.- 3 2 -

[* 3 2 ] 1
. Em

p lo y ee Bu s i n es s Ex pen s es Th es e ex p en s es are fo r m eal s an dtrav el an d t ot al n earl y $ 19 ,0 0 0
. 4 Sect i o n 1 6 2 (a) al l o ws a d edu ct i o n fo r al l o rd i n ary an dn eces s ary

b u s i nes s ex p en s es . Sect i o n 2 7 4 (d ) t ack s m o re s tri n g en ts ub s t an t i at i o n req u i rem en t s o nt o s ect i o n 1 6 2 i n cas es wh ere t he l i ne b et ween p ers o n al an db u s in es s ex p en s es i s b lu rred . Th i s h i g h er h u rd l e affect s ex p en ses fo r en t ert ai n m en t , m eal s , an dl o d gi n g. Secs
. 2 7 4 (d )(1 ), 2 8 0 F(d )(4 ); s ec. 1 .2 7 4 -2 (b )(1 ), In co m e Tax Reg s . An d wh en s u ch
ex p en s es are at i s su e, t ax p ay ers m u s tp res en tad equ at e reco rd s s uffi ci en t t o
es t ab l i s h (1 ) t h e am o u n to f t h e ex p en se, (2 ) t h e t i m e an dp l ace o f t h e ex p en s e, (3 ) t h e b u s in es s p u rp o s e o f t h e ex p en d i tu re, an d(4 ) t h e b u s i n es s rel at i o n s h i p t o th e t ax p ay er o f each ex p en di tu re. Sec. 2 74 (d ) (fl u s h l an g u ag e); s ec. 1 .2 7 4
- 5 T(b )(3 ), (6 ), Tem

p o raryIn co m e Tax Reg s ., 5 0 Fed . Reg . 4 6 0 1 5 , 4 60 1 6 (No v . 6 , 1 9 8 5 ). Ad equ at e reco rd s m ay

co m e i n the fo rm

o f an acco u n tb o o k , a d i ary , a l o g , a
s t at em en to f ex p en s es , tri p s heet s , et c.--b as i cal l y an y d o cu m en t ary

ev id en ce
s u ffi ci en tt o es t ab l i sh each el em en t o f an ex p en di tu re o r u s e. See s ec. 1 .2 74
- 5 T(c)(2 )(i ), Tem

p o rary In co m e Tax Reg s., 5 0 Fed . Reg . 4 6 0 1 7 (No v . 6 , 1 9 8 5 ).

4 Onh i s 2 0 10 Sch edu l e A, Ku rd zi el cl ai m eda $ 3 0 ,8 2 2 u n rei m b urs ed em pl o y ee b u s i n es s ex p en s e d edu ct i o n , o f wh i ch th e Co m m i s si on er al lo wed $ 1 1 ,8 6 9 fo r m eal an den t ert ai n m en tex p en s es .- 3 3 -

[* 3 3 ] Bu ts ect i o n 2 7 4 b ars u s fro m es t i m at i n g s u ch ex p en s es . Id
. p ara. (a)(4 ), 5 0 Fed
. Reg . 4 6 0 1 4
. Th e Co m m is s i o n er arg u es th atKu rd zi el ’ s cl ai m edv eh i cl e, p ark i n g , an d trav el ex p en ses --fo r t ri p s m ad e fro m h i s h o m e i n San Di eg o t o Del ta’ s fl i g h th ub i n Det ro i t --are n o n d educt i b l e b ecau s e t h ey were co m m u t i ng ex p en s es . He al s o arg u es th atKu rd zi el ’ s v eh i cl e ex p en s es fai l t o co m p l y wi th s ect i o n 2 7 4 (d )’ s s tri ct
s ub s t an t i at i o n req u irem en t s . Kurd zi el arg u es th atth e Co m m i s s i o n er co n ced edth i s i s su e. Bu twh atth e Co m m i s si o n er co n ced edwas o nl y s om e o f t h es e ex p en s es . See s up ra n o t e 4 . Kurd zi el d i do ffer a l i s to f t h es e ex p en s es , b u tth ey o n l y b o l s t er th e Co m m i s s i o n er’ s arg u m en tth ath e was try i n g t o d edu ctco m m u t i n g ex p en s es . Th e Sup rem e Co u rth as ex p l ai n edth at s uch ex p en s es are n o td edu ct i b l e b ecau s e th e t ax p ay er m ak es a p ers o n al d eci s i o n as t o wh ere h e l i v es . See Co m m i s s i o n er v . Fl o wers , 3 2 6 U.S. 4 6 5 , 4 7 3 -7 4 (1 94 6 ). InFl owers , th e t ax p ay er
was a res i d en to f J ack s o n , M i s s i s s ip p i wh o d eci d ed t o co n t i n u e t o l iv e i n J ack s o n aft er h e accep t eda jo b i n M o b i l e, Al ab am a. Id . Th e t ax p ay er was n o t al l o wedt o d eductth e co s t s o f h i s trav el d es p i t e t he d i s t an ce, b ecau s e t h e co s t s were p ers o n al . Id
. Th ere are t h ree ex cep t i o n s t o th i s g en eral ru l e o f n o n dudu ct i b i l i t y : (1 ) i f t h e res id en ce i s a t ax p ay er’ s p ri n ci p al p l ace o f b u s i n es s an dh e t rav el s t o
an o th er p l ace o f b u s i nes s, (2 ) i f t h e t ax p ay er h as o n e o r m o re reg u lar wo rk- 3 4 -

[* 3 4 ] l o cat i o n s away

fro m h is res i d en ce, an d(3 ) i f a t ax p ay er t rav el s t o a t em p o rary wo rkl o cat i o n . See Bo gu e v . Co m m i s s i o n er, T.C. M em o . 2 0 1 1 -1 6 4 , 2 0 1 1 W L 2 7 0 9 8 1 8, at* 6 , aff’ d , 5 2 2 F. Ap p ’ x 1 6 9 (3 d Ci r. 2 0 1 3). W e fi n dth atn o n e o f t h es e ex cep t i o n s ap p l i es . Detro i ti s Ku rd zi el ’ s p erm an en two rkb as e--t h ere i s n o th i n g t em p o raryab o u t i t --an d Ku rd zi el h as ch o sen t o l i v e i n San Di eg o . Th ere are, h o wev er, a h an d fu l o f ch arg es o n Ku rd zi el ’ s l i s t th atare fo r t rav el t o d i fferen tl o cat i o n s : M i n n eap ol i s , On t ari o , Lo s An g el es , M i ram ar, an dRen o . Th e s eco ndex cep t io n , fo r t rav el t o m o re t h en o n e

“ reg u l ar wo rkl ocat i o n s ,” al l o ws a d educt i o n fo r a t ax p ay er wh o h as o n e o r m o re reg u l ar wo rk l o cat i on s . See Rev . Ru l . 9 9-7 , 1 9 9 9 -1 C.B. 3 6 1 . Kurd zi el , h o wev er,
s p en t o n l y

o n e o r t wo n i g h t s i n ci t i es o th er th an Det ro i t, an dwe d on ’ tfi n dth at

“ reg u l ar” en o u g h t o fal l wi th i n th i s ex cep t i on . Th e l as tex cep ti on al lo ws a d edu ct i on fo r “ d ai l y tran s p o rt at i on ex p en s es i n cu rredi n g oi n g b et ween th e t ax p ay er’ s res i d en ce an da t em p o rarywo rk

l o cat io n
o u t s i d e t h e m et ro p o l i t anarea wh ere t h e t ax p ay er l i v es an dn o rm al l y wo rk s .” Id
. Ev en i f we t h i n kth i s ex cep t io n co ul dap p ly , we h av e n o way o f kn o w i n g wh et her Ku rd zi el trav el ed d i rect l y fro m h i s res i d en ce i n San Di eg o t o o n e o f t h e n o n Det ro i tl ocat i o ns b as edo n th e l i s to f ex p en s es h e’ s p ro du ced . Th e Co m m i s s i o n er i s co rrect that th e l i stb y

i ts el f i s u n rel i ab l e, an dKu rd zi el ev en ad m i t t ed th ati t- 3 5 -

[* 3 5 ] i n cl u d ed s om e p ers o n al ex p en s es . Th is i s n o ten o ug h . W e ag ree wi th th e Co m m i s s i o n er’ s d i s al l owan ce. 2
. Ho m e M o rt g ag e In t eres t , Real Es t at e Tax es , an dTax Prep arat i o n Fees Th ere are t hree o th er d i s p u t edd edu ct i o n s : h o m e-m o rt g ag e i nt eres t , real

es t at e t ax es , an dt ax -p rep arat i o n fees . Th e Co m m i s s i on er arg u es , “ i ti s n o t
co n tes t edth atp et i t i o n er fai l edt o s ub s t an t iat e h i s cl ai m ed real es t at e t ax es d educt i o n , h o m e m o rt g ag e i nt eres td edu ct i o n, an dt ax p rep arat i o n fee d edu ct i o n .” Ho me mo rt

gag e a n d r ea l -es ta t e t ax: T he Co de g en eral l y al l o ws a d educt i o n fo r al l i nt eres t p ai d o r accru edwi th i n th e t ax ab l e y ear o n a qu al i fi ed
res i den ce. See s ec. 1 6 3 (a), (h )(2 )(D). On Ku rd zi el ’ s 2 01 0 retu rn h e cl ai m eda h o m e-m o rt g ag e i nt eres td educt i o n o f $ 6 4 ,6 88 . On l y $ 1 ,7 2 5 o f t h at am o u n t
rem ai n s i n d i s p u t e. Kurd zi el al s o cl ai m eda real -es t at e t ax d edu ct i o n o f $ 9,4 1 1 , wh i ch th e Co m

m i s s i o n er al l o wedt o th e ex t en to f $ 7 ,5 0 0 . Th is m ean s $ 1 ,9 1 1 i s
s t il l i n d i sp u te. Th e Co m m is s i o n er s ay s th atKu rd zi el fai l edt o s ub s t an t iat e t h es e d educt i o n s --an dthati s ab o u tal l h e s ay s . Th ere’ s n o thi n g el s e i n h i s an s wer,
am en d edan s w er, o r p retri al m em o ran du m , an dh e b arel y ad dres s edthem

i n h i s p o s t tri al b ri ef. Ku rd zi el d i dn ’ tad dm u ch m o re: Wh en we as k edh i s at t o rn ey- 3 6 -

[* 3 6 ] ab ou tthe h om e-m o rt g ag e i n t eres td edu ct i o n attri al , h e rep li ed , “ I d o n ’ t th i n kwe ad dres sed th at
. ” Wh en th ere’ s n ot hi n g i n th e reco rd , d efeat co m es fo r th e p arty wi th th e b u rd eno f p ro of. See s ec. 7 49 1 (a). Th at ’ s Ku rd zi el , s o we fi ndfo r t h e Co m m i s s i o n er o n th es e d i s p u t edam o u n t s . Tax-p r ep a ra t i o n f

ees : A t ax p ay er m ay

d eductth e co s t o f p rep ari n g h i s t ax retu rn s . See s ec. 1 .2 1 2 -1 (l ), In co m e Tax Reg s . Ku rd zi el cl ai m edth i s ex pen s e was $ 8 0 0 o n Sch edu le A o f h i s 2 0 1 0 retu rn . Kurd zi el s ai d attri al th at h i s p ro o f wo u l d b e i n ev id en ce, b u tal l we can fi n di s a J u n e 2 0 1 0 b an ks t at em en tth ats h o ws a ch eckfo r $ 8 0 0 . W e h av e n o th i n g b ey o n dthatt o s h ow t h i s p aym en twas fo r t ax p rep arat i o n , an dKu rd zi el ’ s t es t i m o n y was l i k ewi s e u n h el p fu l . W e al s o d i sal l o w th i s d edu ct i o n . III. NetOp erat i n g Lo s s es Th e fi n al d i s pu t edd edu ct i o n s are t h e NOLs th atKu rd zi el carri edfo rwardt o h i s 2 0 0 7 -1 0 t ax retu rn s . NOLs are t he ex ces s o f d educt i o n s al l o w edo v er g ro s s i n co m e, an dare p erm i t t edb y

s ect i o n 1 7 2 (a). Bo th p art i es ag ree t h atth e d edu ct i b i l i ty o f Ku rd zi el ’ s NOLs h in g es o n o u r fi n d i n g h e h ada p ro fi t m o t i ve fo r h i s Fi refl y act i v i t i es . Si n ce we fo un dthatKu rd zi el d i dn o t , we d en y h i s NOL d edu ct i o n s fo r al l y ears ati s s u e.- 3 7 -

[* 3 7 ] IV. Sect io n 6 6 6 2 (a) Pen al t i es Th e Co m m is s i o n er d et erm i n eds ect i o n 6 6 6 2 (a) p en al ti es ag ai ns tKu rd zi el fo r 2 0 0 7 , 2 0 08 , 2 0 0 9 , an d2 0 10 . Sect i on 6 6 6 2 i m p o s es a 2 0 % p en al ty

o n
u n d erp aym en t s o f t ax du e t o ei th er a s ub s tan t ial u n d ers t at em en t , s ee s ec. 6 6 6 2 (b )(2 ), (d ), o r n eg l i gen ce o r d i s reg ardo f t h e ru l es o r reg u lat i o n s , s ee s ec. 6 6 6 2 (b )(1 ), (c). An dwh en a t ax p ay er i s an i n d i v idu al , the Co m m i ss i o ner h as th e i n i t i al b u rd en o f p ro du ct i o n fo r p en al t i es . See s ec. 7 4 9 1 (c). Th e Co m m is s i o n er arg u es th atKu rd zi el i s s ub jectt o a s ub s t an ti al

u n d ers t at em en tp en al ty

o n l y fo r t h e 2 0 0 7 an d2 0 1 0 t ax y ears . He m eet s p arto f h i s b u rd enfo r t h es e y ears b ecau s e Ku rd zi el ’ s u n d ers t at em en t s are b ot h m o re t h an $ 5 ,0 0 0 an dm o re t h an 1 0 % o f t h e t ax h e s ho u l d ’ v e rep ort edfo r each o f th es e y ears . See s ec. 6 6 6 2 (d )(1 )(A). Th e Co m m is s i o n er al s o arg u es th atKu rd zi el i s s ub jectt o a n eg l i g en ce p en al ty , b u tth i s t i m e fo r each o f t h e y ears ati s s u e. He m eet s p arto f h is b u rd en t o
es t ab l i s h n eg l i gen ce b ecau s e h e s ho wed th atKu rd zi el “ fai l[ed ] t o m ak e a
reas on ab l e at t em

p tt o co m p l y wi t h th e p ro vi s i o n s o f th e i n t ern al rev en u e l aws ,”
s ec. 1 .6 6 62 -3 (b )(1 ), In co m e Tax Reg s ., b y m i s rep res en t i n g h i s n o t -fo r-p ro fi t act i vi t i es as an “ ai rp l an e l eas i n g ” b u s i n es s . Th i s rep o rt i n g p o s i ti o n al l o wed- 3 8 -

[* 3 8 ] Ku rd zi el t o ach i ev e l arg e, i n co m e-o ffs et ti n g d edu ct i o n s t h atwere “ to o g o o d t o b e t ru e.” Id . s ub di v . (i i). Ku rd zi el arg u es thath e d o es n ’ t o we p en al t i es fo r an y o f t he y ears ati s s u e b ecau s e h i s l os s es are “ real ” an dh e act edwi th reas o n ab le cau s e an di n g o o dfai t h b y rep o rt i n g h i s Fi refl y

act iv i t i es o n h i s Sch edu l es C i n acco rd an ce wi th t h e p l an e’ s o wn ers h i p an do p erat i o n . See s ec. 6 6 6 4 (c)(1 ); s ee al s o s ec. 1
. 6 6 6 4
- 4 (b )(1 ), In co m e Tax Reg s . He s ay s th ath e l i s t edth e act i v i t i es as “ ai rp l an e l eas i ng ” s i n ce t h e Fi refl y i s o wn edb y a t ru st , wh ich i n tu rn l eas es i to u t t o th e Fi refl y LLC. Th i s m ay m ak e s en s e o n s om e l ev el , b u tth e fact i s th atth i s rep res en t at i o n i s m i s l ead i ng , es p eci al ly g i v en th atSch edu l e C’ s Li n e A as k s fo r th e “ [p ] ri n ci p al b us i n es s o r p ro fes s i o n , i n cl ud i ng p ro du ct o r s erv i ce (s ee i n s tru ct i o n s ).” 5 If Ku rd zi el was n ’ ts u re wh at t o p u t i n o rd er t o s h o wthath e was real ly o n ly h o l di n g th e Fi refl y

fo r ap p reci at i o n , th ere were n u m ero u s way s h e
co u ldh av e m ad e t h is m o re cl ear, e.g ., at t ach i n g a s up p o rt i n g s t at em en t o r ev en ju s t l i s t i n g “ h o l d i n g ai rp l an e as i n v es t m en t .” Ku rd zi el ’ s rep o rt i n g p o s it i o n o n l y rei n fo rces o u r fi n d i ng th ath e d i dn ’ th av e a p ro fi tm o t i v e. W e th erefo re d o n ’ t b el i ev e h e h as s h o wng oo d fai th o r reas o n ab l e cau s e.

5 Th e 2 0 1 0 i n s tru ct io n s fo r Sch edu l e C s p eci fy : “ Des cri b e t h e b u s i n es s o r p ro fes s i on al act i v i ty th atp ro v i d edy o ur p ri n ci p al s o u rce o f i n co m e * * * . Gi v e th e g en eral fi el do r act i vi ty an dth e ty

p e o f p ro du cto r s erv i ce.”- 3 9 -

[* 3 9 ] Bu tth e Co m

m i s s i o n er co m

m i t t eda Graev erro r. Parto f t h e Co m m i s s i o n er’ s b u rd en o f p ro du ct i o n o n t h e p en al t i es ati s s u e h ere i s s h o wi n g th atth ey were “ p ers o n al l y ap p ro v ed(i n wri t i n g ) b y th e i m m ed i at e s up erv i s o r o f th e i n d i v i du al m ak i n g s uch d et erm i n at i o n .” Sec. 6 7 5 1 (b )(1 ); s ee Graev III, 1 4 9 T.C. at4 9 3 ; s ee al s o Fo rdv . Co m m i s s i o n er, T.C. M em o . 2 0 1 8 -8 , at* 6 , aff’ d , 7 5 1 F. Ap p ’ x 8 4 3 (6 th Ci r. 2 0 1 8 ). He d i dn ’ ti n tro du ce an y ev i d en ce o f s u ch ap p ro v al attri al d es pi t e th e fact thatKu rd zi el p l aced p en al t i es at i s s ue. Th u s , th e Co m m i s s i o n er d i dn o tm eeth i s b u rd en o f p ro du ct i o n , an dKu rd zi el i s fo r t h i s
reas on al o n e n o tl iab l e fo r the accu racy -rel at ed p en al t i es d et erm in edag ai n s th i m fo r 2 0 0 7 -1 0
. W i th n o o u tri g h t v i ct or,
Deci s i o n s wi l l b e en t eredu n der Ru l e 1 5 5
.