After many setbacks, Dr. Csaba L. Magassy got his ship in shape. He thought deducting a sinking charter business would sail by the Internal Revenue Service.

 

The plastic surgeon had bought a used Feadship yacht, allegedly built for Henry Ford II, for $1.3 million; the seller was to use $300,000 of this to refurbish it. The sales agent told him a new yacht like this would cost $9 million.

 

Two months later Magassy traveled from his home in Potomac , Md. , to Florida to see the yacht for the first time. The interior and exterior were in extremely poor condition. This was just the beginning. Because the yacht wasn't taken out of the water, he didn't see the extensive rust and corrosion on the hull. And the seller corporation was dissolved before it refurbished the yacht.

 

With a boat in need of repair, the surgeon turned to a friend of his brother-in-law who recommended Angus Yachts, a shipyard in Alabama . Angus estimated restoration would cost $218,000. After Angus worked on the yacht several months and billed $900,000, Magassy hired Captain Anthony Coby to check it out. Coby said the work had become a “gravy train” for Angus and recommended moving the yacht to a shipyard in Bayou La Batre, Ala. Here they redid most of the restoration work.

 

At last, the day came when the surgeon and his family could use it in Florida . When they weren't on the yacht, it was used in a charter fleet, for a little more than two years. Then he sold it.

The purchase price, restoration, moving costs, loss from operations and loss on the sale totaled $4.1 million. He deducted these as business costs.

 

The IRS sank the deductions.

 

The court considered these factors:

 

•  Magassy and his family used the yacht for dinner cruises, cocktail parties and vacation trips to the Bahamas ;

•  Magassy's charter activity had losses for all three years of operation;

•  Magassy had no reasonable basis for making a profit;

•  Magassy spent very little of his own time in the business, and

•  Magassy had no history of success in the charter business.

 

The court agreed with the IRS in disallowing the deductions.

 

PLANNING: Whether a sideline activity is yacht chartering, farming or raising show dogs, you must operate it like a business. The courts consider you have, if you:

 

•  Investigated the profit potential,

•  Are an expert in this activity or hired experts,

•  Closely monitored operations,

•  Maintained a good set of books and

•  Changed the activity or closed it down when it became clear there would be little or no profits.

 

For success stories against an IRS challenge of a part-time activity, see Hobby vs.Business at www.taxfables.com