John R. Melecio, Jr. v. Commissioner of Revenue (June 28, 2013)

Commonwealth of Massachusetts

Appellate Tax Board


JOHN R. MELECIO, JR.		v.		COMMISSIONER OF REVENUE


Docket No. C310662					Promulgated:
								June 28, 2013


This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39 from the refusal of the Commissioner of Revenue ("Commissioner" or "appellee") to abate personal income taxes assessed to John R. Melecio, Jr. ("Mr. Melecio" or "appellant") for the tax years ended December 31, 2006 and December 31, 2007 ("tax years at issue").
	Commissioner Scharaffa heard this appeal and was joined by Chairman Hammond and Commissioners Rose, Mulhern, and Chmielinski in a decision for the appellee.  
These findings of fact and report are made pursuant to requests by the appellant and the appellee under G.L. c. 58A, § 13 and 831 CMR 1.32. 
 

	Morris N. Robinson, Esq. and Timothy R. Weeks, Esq. for the appellant.

	Bensen V. Solivan, Esq. and Timothy R. Stille, Esq. for the appellee.



    
    FINDINGS OF FACT AND REPORT

On the basis of the testimony and exhibits offered into evidence at the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings of fact.
The appellant timely filed a 2006 Massachusetts Nonresident Tax Return (Form 1-NR/PY) on or about April 15, 2007, and timely filed a 2007 Massachusetts Resident Income Tax (Form 1) on or about April 15, 2008.  For both years, the appellant filed a Schedule C, "Massachusetts Profit or Loss from Business," associated with his boat-chartering activity.  For tax year 2006, the appellant reported gross receipts and deductions in the amounts of $4,800 and $79,300, respectively, and, for tax year 2007, the appellant reported gross receipts and deductions of $2,400 and $56,028, respectively. 
In January 2009, the Department of Revenue's Desk Audit Bureau ("Audit Bureau") began an examination of the appellant's 2006 and 2007 tax returns.  Upon review, the Audit Bureau concluded that the appellant's boat-charter activity did not rise to the level of a trade or business and, therefore, the appellant's Schedule C deductions for the tax years at issue were disallowed.  On July 17, 2009, the Commissioner issued a Notice of Intention to Assess ("NIA") notifying the appellant of her intent to assess additional taxes, exclusive of interest, in  the amounts of $4,201 for 2006 and $2,969 for 2007.  On November 9, 2010, the Commissioner sent to the appellant a Notice of Assessment, assessing the additional taxes proposed on the NIA, plus interest, for the tax years at issue.
	On December 31, 2010, the appellant filed an Application for Abatement/Amended Return (Form CA-6) with the Commissioner, contesting the Commissioner's assessments for the tax years at issue.  By Notice of Abatement Determination dated March 12, 2011, the Commissioner notified the appellant that the abatement application for the tax years at issue was denied.  On March 24, 2011, the appellant filed a Petition Under Formal Procedure with the Board.  On the basis of these facts, the Board found and ruled that it had jurisdiction over this appeal.   
At the time of trial, Mr. Melecio was a 50-year old single male living at the Boston Harbor Shipyard Marina at 256 Marginal Street, East Boston, Massachusetts.  The appellant was born and raised in San Juan, Puerto Rico.  Growing up in Puerto Rico, the appellant learned to operate and maintain the family's 22-foot sport fishing boat.  After moving to the United States, the appellant served in the United States Marine Corps where he operated small military boats, less than 20 feet in length.  
	In 1989, while in his late 20s, the appellant began working for the Federal Aviation Administration ("FAA") as an air traffic controller at Logan International Airport ("Logan airport").  His responsibility was to "provide safe, orderly and expeditious flow of air traffic in and out of Logan [airport]" using radar equipment and constant radio contact with the aircraft.  The appellant testified that there were three work shifts: 6:00 am to 2:00 pm, 2:00 pm to 10:00 pm, and 10:00 pm to 6:00 am.  He further testified that the three shift schedules alternated so that one week he worked day shifts and the next week he worked night shifts.  In addition, the appellant's days off rotated every six weeks.  In 2006 and 2007, the appellant earned $130,268 and $138,512, respectively, as an air traffic controller.
Mr. Melecio testified that air traffic controllers are eligible for retirement once they "hit the age of 50 with 20 years of service" and that retirement is mandatory at the age of 56.  He further testified that "somewhere [in] 1999 to 2000 I was already looking at what to do for retirement."  
About the same time, while visiting a friend in New Jersey, the appellant met Mr. Rob Bellanich, the owner of New York Boat Charter, which provided charters in New York harbor for six people or less.  Based on his conversation with Mr. Bellanich, which lasted approximately 45 minutes, the appellant decided that the charter business seemed like a "great idea."  The appellant further determined that a similar niche, charters for six or fewer persons, existed in Boston and therefore thought this "would be a great business plan."  
On July 12, 2002, the appellant purchased a 1979 53' Hatteras Motor Yacht for $175,000, which he named La Nina.  Subsequently, the appellant borrowed approximately $67,000, which he expended to make repairs to the yacht.  In November 2002, the appellant received a certificate of training from the Coast Guard for completing an on-line course for "America's Boating Safety."  The yacht was initially moored in Annapolis, Maryland, where the engines were refurbished and some structural work was done.  In September, 2003, the yacht was brought to its current mooring at the Boston Harbor Shipyard Marina in East Boston.  The appellant never owned a boat before La Nina.      
In 2004, approximately two years after he purchased the yacht and expended more than $240,000 on its acquisition and repairs, Mr. Melecio prepared a business plan for Admiral Boston Charter, LLC ("Admiral Charter").  The business plan stated that Admiral Charter was organized to "take advantage of a specific gap" in the yacht charter and cruise line market in Boston Harbor, specifically "in the area of affordable yacht cruises on Boston Harbor for groups of six people or less."  The appellant opined that this alleged gap in service, coupled with a demand for Boston Harbor cruises, indicated that a new entrant charter could be expected to capture a significant portion of current cruises.  However, the appellant did not provide any evidence that he researched the boat-charter business, beyond his one-time conversation with Mr. Bellanich, or that such an "under-served market" existed in Boston Harbor.
Even though the appellant had never owned or operated a boat-charter business, he did not seek financial, business or legal advice from an accountant, attorney, or other professional either prior to or during the tax years at issue. In addition, the appellant did not contact the United States Coast Guard ("Coast Guard") prior to starting his business to determine the licensing or registration requirements.  When questioned by the hearing officer during his direct examination, Mr. Melecio acknowledged that since he did not obtain his captain's license until 2008 he was, therefore, selling charters illegally during the tax years at issue.  On cross-examination, the appellant also testified that to provide tours for six people or less the Coast Guard required only an "operation of uninspected vessel license," known as a "six pack OUPV".  The appellant did not have this license.    
The appellant made no attempt to analyze the costs, risks, and returns of running a boat-charter business or to calculate a break-even point.  Instead, the appellant's business plan assumed that the business would be profitable beginning in its first year of operation, based on estimated annual revenue of $20,000, assuming one cruise per week, and annual expenses of $16,500.  However, the appellant failed to include in his business plan expenses for advertising, insurance and loan interest payments.  
The appellant began reporting his boat-chartering activity as a business for income tax purposes in 2005 until the business closed in 2008.  During the tax years at issue, the appellant reported total losses of $128,128, reported on Schedule C of his federal income tax returns as follows:
Admiral Boston Charter	2006	2007	Combined	
Total Income	$   4,800	$   2,400	$    7,200	
Advertising	-	-	-	
Car and truck expense	$   5,801	-	$    5,801	
Depreciation 	$  49,428	$  41,965	$   91,393	
Repairs and maintenance	$   1,296	-	$    1,296	
Other expenses	$  22,775	$  14,063	$   32,838	
Total expenses	$  79,300	$  56,028	$  135,328	
Net profit (or loss)	 $ (74,500)	$ (53,628)	   $(128,128)	

The only evidence in support of the claimed expenses were two expense reports, which listed the money purportedly spent on the charter activity, grouped into several categories.  However, many of the line items, specifically in the repairs, equipment and miscellaneous categories, lacked description or detail.  Moreover, the appellant did not provide any supporting documentation such as cancelled checks, bills or invoices.  Also, the only evidence of the activity's income and record of the appellant's customers was the expense reports.  These reports failed to include a specific customer's name, address, or telephone number, but instead provided only an "abbreviation of like either the name of the company or something like that." 
During the tax years at issue, Admiral Charter did not lease an office or have its own phone number; rather, the appellant used the boat and his personal cell phone to conduct business.   Also, Admiral Charter did not have its own bank account; instead, the appellant commingled his business and personal banking.  
The appellant testified that he advertised his business through fliers, mailings, and visits to local businesses and conferences.  The appellant offered into evidence one flier that he claimed was used during the tax years at issue.  On cross-examination, however, the appellant conceded that the flier was in fact created in 2008, as reflected by reference to the appellant's captain's license that he received in June, 2008.  Further, the appellant testified that he used the Yellow Pages to get names of brokerage houses, attorneys, and real estate offices and that he either sent mailings to these businesses or visited them personally.  He did not keep any records, including the names and addresses, of the businesses that received the mailings.  Despite his asserted use of flyers and mailings as his primary form of advertisement, the appellant did not report any advertising expenses for the tax years at issue.
The appellant repeatedly testified that he modeled his business after Mr. Bellanich's New York boat-chartering business.  In two articles, which the appellant provided to the Commissioner to prove the success of Mr. Bellanich's "similar" business model, Mr. Bellanich stated that his business more than doubled after he created a website.  Despite this knowledge, the appellant did not create his own website in an effort to increase revenue.  Also, the appellant never retained the services of a rental agent or broker to help him sell charters to potentially increase revenue.    
	The appellant claimed that, in addition to his full-time employment at Logan airport in East Boston, he spent approximately thirty-six to fifty hours each week working on the business, including cleaning, maintenance, and advertising.  The appellant did not keep daily logs or records of his specific activities.  The appellant also claimed that during the tax years at issue, he lived at 21 Dumpling Cove, in Newington, New Hampshire, approximately 60 miles away from Boston Shipyard & Marina, located in East Boston, where La Nina was moored.  Mr. Melecio testified that he "rented a room" from a friend and that there was no set rent, he "just helped him with some money just to defray some of the costs" and also helped out around the house by mowing the lawn, shoveling, or "whatever needed to be done."  
The appellant testified that he closed Admiral Charter in 2008 when it "became evident that he could not sustain it."  The appellant has not made any attempts to sell the boat and stated that in February, 2008, he made La Nina his primary residence.  
On the basis of the evidence presented, the Board found that the appellant did not engage in the boat-charter business as a trade or business and, therefore, the appellant was not entitled to deduct the losses reported on Schedule C of his tax returns for the tax years at issue.  
The Board found that the appellant did not operate the boat-charter business in a businesslike manner.  Although the appellant had no prior experience of owning and operating a boat-charter business, he based his decision to purchase a boat, create a business model, and start Admiral Charter, on a forty-five minute conversation with an individual who owned and operated a "similar" business in New York.  There was no evidence that the appellant spoke with charter operators in Boston or that he even researched the subject.  Further, the appellant never consulted with any professional for advice with respect to the commercial merits of his venture, nor did he contact the Coast Guard to determine his licensing requirements. Accordingly, the Board found that there was little evidence to support a showing that the appellant investigated the yacht-charter business sufficiently prior to or after the purchase of La Nina and the formation of Admiral Charter. 
The Board further found that the appellant failed to keep separate bank accounts but instead commingled his business and personal funds, and that his business records were scant and unreliable.  The appellant's expense reports merely listed the purported expenses associated with the business, grouped into various categories but failed to include any supporting documentation such as cancelled checks, bills or invoices.  Notably, the appellant failed to list expenses for advertising or loan interest payments.  Also, the appellant did not keep records of the names or addresses of businesses that purchased charters and therefore could not track the usage and follow-up in subsequent years.  Furthermore, there is nothing in the record to support a finding that the appellant used these reports to evaluate the profitability of the business.    
The Board further found that during the tax years at issue, the business' marketing activities were minimal.  The appellant testified that the main form of advertising was done through fliers and mailings.  However, the only evidence offered was a copy of a flier prepared in 2008, after the tax years at issue, and the appellant did not maintain records of previously marketed customers.  The appellant never created a website nor did he retain the services of a rental agent or broker to help him sell charters in an effort to increase revenue.    
	The appellant maintained that he worked for Admiral Charter thirty-six to fifty hours per week, in addition to his full-time employment at Logan airport, and that he commuted daily to his residence in Newington, New Hampshire, approximately sixty miles from East Boston.  However, for 2007 the appellant filed a Massachusetts resident tax return.  Accordingly, the Board found the appellant's testimony on this issue lacked credibility and that his statements regarding the amount of time spent working on the yacht-charter activity were little more than unsupported self-serving statements that did not support a finding of a profit motive or the conduct of a trade or business.  
In conclusion, the Board found and ruled that the appellant was not engaged in the yacht-charter activity with a profit objective and therefore was not engaged in a trade or business.  The Board further found and ruled that the appellant was not entitled to deduct the losses generated from his yacht-charter activity. Accordingly, the Board issued a decision for the appellee in this appeal.    



OPINION
	Massachusetts gross income is federal gross income with certain modifications not relevant to this appeal.  G.L. c. 62, § 2(a).  Pursuant to G.L. c. 62, § 2(b), Massachusetts gross income is divided into three parts:  Part A, interest, dividends, and gains from assets held for less than one year; Part B, income which is neither Part A nor Part C; and, Part C, gains derived from assets held for more than one year.  Since the receipts generated from the appellant's boat-charter activities are neither interest, dividends, nor capital gains, they are therefore "Part B gross income."  G.L. c. 62, § 2(b)(2).    
Part B adjusted gross income is Part B gross income less "the deductions allowable under section sixty-two . . . of the [Internal Revenue] Code" ("Code"), with certain modifications not relevant to this appeal.  Code § 62(a)(1) provides for "deductions allowed by this chapter (other than by part VII of this subchapter) . . . which are attributable to a trade or business carried on by the taxpayer."  In particular, Code § 162(a) allows a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business."  
Code § 183 limits Code § 162 by "specifically disallowing  . . . deductions attributable to activities 'not engaged in for profit.'"  Dreicer v. Commissioner of Internal Revenue. 665 F.2d 1292, 1294 (D.C. Cir. 1981).  Section 183(c) defines an "activity not engaged in for profit" as "any activity other than one with respect to which deductions are allowable under section 162 or under paragraph (1) or (2) of section 212."  
In contrast to federal law, Massachusetts has not adopted Code § 212, which allows a deduction for ordinary and necessary expenses paid or incurred for the production or collection of income, even though not connected with a trade or business.  Code § 212 is found at part VII of subchapter B, which is explicitly excluded from the deductions allowed under Code § 62(a)(1) and, therefore, not deductible for Massachusetts purposes under G.L. c. 62, § 2(d)(1).  Accordingly, in computing Massachusetts adjusted gross income, a taxpayer may deduct only those expenses associated with a trade or business that was engaged in for profit.  See G.L. c. 62, § 2(d)(1) and Code §§ 162(a), 183(a); see also Dreicer, 665 F.2d at 1294 (ruling that  taxpayer claiming a deduction under § 162 "must be prepared to demonstrate an associated profit motive in order to avoid the ban of Section 183.").  
In the present appeal, the appellant claimed deductions for expenses associated with his boat-chartering activity.  It is well-settled that the "taxpayer bears the burden of proving that he is entitled to claim deductions against Massachusetts income."  McLaughlin v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2005-538, 547.  A taxpayer must show a "number of elements of proof" to claim deductions related to the conduct of a "trade or business."  Id. at 2005-548-49; see also Rosse v. Commissioner of Revenue, 430 Mass. 431, 435 (1999).
Because a "trade or business" is defined for Massachusetts tax purposes in G L. c. 62, § 1 as having the "same meaning" as in Code § 62, Massachusetts courts look to federal decisions under the Code to determine whether activities constitute a trade or business.  See Deveau v. Commissioner of Revenue, 51 Mass. App. Ct. 420, 429 (2001) (citing Rosse, 430 Mass. at 439).  The United States Supreme Court has held that "to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose for engaging in the activity must be for income or profit."  Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).  The taxpayer's expectation of profit need not be a reasonable one but the activity must be "entered into in good faith, with the dominant hope and intent of realizing a profit," independent of tax savings.  Schwartz v. Commissioner, 62 T.C.M. (CCH) 419 (1991), at *10-12; Treas. Reg. § 1.183-2(a).	 
Whether a taxpayer has the requisite profit objective is a "question of fact, the burden for which is on the taxpayer."  Schwartz, 62 T.C.M. 419, at 11; Dreicer, 665 F.2d. at 1299.  "Greater weight is to be given to objective facts than to [the taxpayer's] mere statement of [] intent."  Engdahl v. Commissioner, 72 T.C. 659, 666 (1979); see also Treas. Reg. § 1.183-2(a) and (b).  Section 1.183-2(b), provides a list of factors relevant to the issue as to whether the taxpayer has the requisite profit objective:  (1) the manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his or her advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that the assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or loss with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) whether elements of personal pleasure or recreation are involved.  
This list is nonexclusive, and the number of factors for or against the taxpayer is not necessarily determinative, but rather all relevant facts and circumstances must be taken into account, and more weight may be given to some factors than to others.  Schwartz, 62 T.C.M. (CCH) 419, at *11.  Moreover, "all nine factors do not necessarily apply in every case."  Verrett v. Commissioner, 104 T.C.M. (CCH) 141 (2012), at *7.  "The issue is one of fact to be resolved not on the basis of any one factor but on the basis of all of the surrounding facts and circumstances."  Allen v. Commissioner, 72 T.C. 28, 34 (1979).  
The manner in which a taxpayer carries on an activity is one factor to consider in determining whether a profit motive exists.  Treas. Reg. § 1.183-2(b)(1).  Maintaining complete and accurate books and records, carrying on the activity in a manner similar to other activities that are profitable, and changing operating methods to adopt new techniques or abandon unprofitable methods in a manner consistent with intent to improve profitability indicate that a taxpayer conducted an activity for profit.  See Engdahl, 72 T.C. at 666-68; Treas. Reg. § 1.183-2(b)(1).
Although a taxpayer is not required to maintain a sophisticated cost accounting system, he is expected, at a minimum, to keep records that enable him to make informed business decisions as to the activity.  Dennis v. Commissioner, 100 T.C.M. (CCH) 308 (2010), at *21; Burger v. Commissioner, 50  T.C.M. (CCH) 1266 (1986), at *21-22, aff'd 809 F.2d 355, 359 (7th Cir. 1987).  If it seems that a taxpayer's records are used solely for purposes of supporting tax deductions and preparing tax returns, such records do not indicate profit motive.  Wilmot v. Commissioner, 102 T.C.M. (CCH) 599 (2011), at *13-14.  Further, the commingling of personal and business funds is an indication that a taxpayer did not conduct his activity in a businesslike manner, but rather as a hobby.  Ballich v. Commissioner, 37 T.C.M. (CCH) 1851-40 (1978), at *16-17.
In the present appeal, the appellant failed to keep a separate bank account for his boat-charter activity but instead commingled his business and personal funds.  Furthermore, the appellant's recordkeeping was unreliable.  Although the 2006 and 2007 expense reports listed the purported expenses associated with the boat-charter activity, the appellant failed to provide supporting documentation, such as cancelled checks, receipts or invoices.  With respect to the business' revenue, the appellant failed to keep records of his customers, but instead listed only abbreviated codes.  The Board found that the appellant's boat- charter activity was operated, as most hobbies are, on a relatively informal basis.  The Board further found that the appellant's recordkeeping represented nothing more than an effort to substantiate his Schedule C deductions and were not prepared for the purposes of cutting expenses, increasing profits, and evaluating the overall performance of the boat-charter activity and, therefore, were not indicative of a profit motive.  
A taxpayer may further exhibit his profit objective in the manner in which he advertises his business and institutes changes to improve profitability.  Treas. Reg. § 1.183(2)(b).    "A single form of advertisement itself may not establish that a taxpayer has carried on his activity in a businesslike manner." Dennis v. Commissioner, 100 T.C.M. (CCH) 308, at *25.  "[D]ifferent kinds of advertising media may allow the taxpayer 'to expand [his] potential market and to attract new customers'" and may exhibit a profit motive.  Id. (quoting Cohn v. Commissioner, 46 T.C.M. (CCH) 286 (1983)).  In the present appeal, the appellant purportedly advertised mainly through flyers and mailings.  He did not, however, keep records of previously marketed customers or those businesses that allegedly purchased charters and, therefore, the appellant could not conduct follow-up phone calls in an effort to attract new, or repeat, business.  Schwartz, 85 T.C.M. (CCH) 1058, at *18.  
Moreover, even after learning that Mr. Bellanich, the appellant's claimed model for his boat-charter business, more than doubled his business after launching a website, the appellant did not launch his own website.  See Sanders v. Commissioner, 77 T.C.M. (CCH) 2237 (1999) (finding that petitioner's failure to attempt to reach a larger customer base is not consistent with a profit motive).  Also, the appellant did not retain the services of a rental agent or broker to help him sell charters in an effort to increase revenue.  Accordingly, the Board found that the appellant's attempts to publicize or advertise the boat-chartering activity were minimal and did not indicate a profit objective.     
A taxpayer's expertise, research, and study of an activity, as well as his consultation with experts, may be indicative of a profit motive.  Treas. Reg. § 1.183-2(b)(2).  Courts have made clear that the focus is upon expertise and preparation with regard to the economic aspects of the particular business.  Wesinger v. Commissioner, 78 T.C.M. (CCH) 771 (1999), at *21.  "'While a formal market study is not required, a basic investigation of the factors that would affect profit is.'"  Id. at *21.  Furthermore, taxpayers should not only familiarize themselves with the undertaking, but should also "consult or employ an expert, if needed, for advice on how to make the operation profitable."  Burger, 809 F.2d at 359.  
There is little indication in the record to show that the appellant made any serious effort to make an informed business judgment.  Although Mr. Melecio was an experienced sailor, he had no experience with boat-chartering nor had he ever owned or operated a business.  Despite his lack of knowledge, there is no evidence that the appellant sought any professional advice with respect to the commercial merits of his venture.  Instead, the appellant based his decision to purchase a boat and start a business based on a 45-minute chance meeting with the owner of a "similar business" in New York.  The Board therefore found that the appellant's actions were a further indication that he was not operating his boat-charter business for profit.  Compare Hellings v. Commissioner, 67 T.C.M. (CCH) 1988 (1994) (finding that taxpayers' consultation with numerous experts in the chartering business indicated that the taxpayers were operating their chartering business for profit), with Hilliard v. Commissioner, 70 T.C.M. (CCH) 898 (1995) (finding that taxpayer, who was an experienced sailor but had no experience with chartering and did not seek out assistance, was not operating his boat-chartering business for profit).  
If the taxpayer devotes "much of his personal time and effort" to conducting an activity, this may indicate a profit motive, particularly if the activity lacks "substantial personal or recreational aspects".  Treas. Reg. § 1.183-2(b)(3); Golanty, 72 T.C. at 415.  The appellant testified that during the tax years at issue he spent approximately 36-50 hours per week working on his business, including maintaining and cleaning the boat and advertising the business.  During this time, the appellant maintained full-time employment at Logan airport and, allegedly lived approximately sixty miles away in New Hampshire.  Based on these facts, and reasonable inferences, the Board found that the appellant's statement of the amount of time spent working on the boat-chartering business was overstated.  The Board further found that many of the appellant's activities, including cleaning and maintaining the yacht were consistent with the use of the yacht for personal use and would have been performed whether yachting was a business, a hobby, or other personal use.  See Warden v. Commissioner, 69 T.C.M. (CCH) 2432 (1995), aff'd 1997 U.S. App. LEXIS 6392 (9th Cir. April 2, 1997) (finding that the time taxpayers spent cleaning and maintaining their yacht was consistent with the use of the yacht for recreation.
A taxpayer's financial status may also bear on whether an activity is conducted for profit. Treas. Reg. § 1.183-2(b)(8).  Substantial income from sources other than the activity in question may indicate that the taxpayer is not engaged in the activity for profit, particularly if the losses generate substantial tax benefits.  Engdahl, 72 T.C. at 666-68.  The limitations in § 183 are "designed to prevent taxpayers from offsetting unrelated income with losses from an activity not carried on for profit."  Magassy v. Commissioner, 87 T.C.M. (CCH) 791 (2004), at *27.  During 2006 and 2007 the appellant was employed as an air traffic controller earning $130,268 and $138,512, respectively.  During the same time period, the appellant reported net losses from his boat-chartering activity of $74,500 and $53,628, respectively, thereby reducing his taxable income.  The Board found that the appellant's income provided him with a comfortable living and the reported losses would have allowed him to realize tax savings.  
While deriving enjoyment from the particular activity at issue is not conclusive as to whether the activity is engaged in for profit, it is a factor to be considered.  Treas. Reg. § 1.183-2(b)(9). The appellant has had an interest in boats since he was a child growing up in Puerto Rico.  The Board found that the personal pleasure or recreation that appellant derived from the boat-charter activity, while not preclusive of a profit motive, also does not support the appellant's claim that he was engaged in the activity primarily for profit.
Having considered the above factors and recognizing that no one factor is controlling, and after analyzing the record as a whole, the Board found and ruled that the appellant did not meet his burden of proving that he was engaged in the boat-charter activity with the profit objective defined in I.R.C. § 1.183 and therefore was not entitled to take the business deductions on Schedule C of his Form 1-NR/PY for 2006 and Form 1 for 2007.

Accordingly, the Board issued a decision for the appellee in this appeal.

  THE APPELLATE TAX BOARD 


             
				   By: ________________________________
					  Thomas W. Hammond, Jr., Chairman




A true copy:

Attest: _________________________
	      Clerk of the Board

 The appellant's actual report expenses designated as "other" included dockage, insurance, electric, equipment, telephone, internet, maintenance, repairs, and miscellaneous.
 Part VII of Subchapter B of the Code includes Code §§ 211 through 224.

ATB 2013-767