                               T.C. Memo. 2019-20



                         UNITED STATES TAX COURT



               EDWARD G. KURDZIEL, JR., Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 21186-12, 12674-13.               Filed March 21, 2019.




      Robert J. Gumser, for petitioner.

      Michael S. Hensley, Erin Kathleen Salel, and Jeffrey L. Heinkel, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


      HOLMES, Judge: Edward G. Kurdziel is the only man in America licensed

to fly a Fairey Firefly. He is also the only man in America who has a Firefly to fly.

But restoring this old WWII fighter and submarine hunter took bales of money,
                                       -2-

[*2] which he’s never gotten back. Kurdziel says the restoration was a business

and claimed big deductions for it on his returns for 2007 through 2010. The

Commissioner says it was all just a very expensive hobby.

                              FINDINGS OF FACT

      Edward Kurdziel, also known as Captain Eddie, is a highly skilled

mechanical engineer and an experienced pilot. He finished high school when he

was just 16 years old and went to Marquette University as “the first kid ever

accepted * * * after two years of high school.” Kurdziel’s higher education--paid

for in full by the United States Navy--didn’t end with his undergraduate degree.

At 19 he landed in graduate school for engineering, and all the while worked as a

private pilot on the side.

      School flew by, and Kurdziel was only 21 when he received a commission

in the Navy. There he spent 25 years as a fighter pilot, 8½ of which were on

active duty. After he was honorably discharged, he started flying 747s for

Northwest and then Delta Airlines, where he remains a captain. In total he has 45

years of flying experience under his wings.
                                           -3-

[*3] I.        The Fairey Firefly

          A.    Background and Purchase

          In 1994, not long after beginning his commercial airline career, Kurdziel

bought a two-seat fighter aircraft known as the Fairey Firefly WB518/N518WB.

American warplanes of 75 years ago had some great names--Hellcats, Avengers,

Flying Fortresses, Demons, and Thunderbolts. Our British allies also had some

fine names for their aircraft--Hurricanes and Spitfires, Tempests and Typhoons.

And then there were the warbirds made by Fairey Aviation, which included the

Albacore and Barracuda, the Spearfish and the Seafox--and the plane at the center

of these cases, the Fairey Firefly. The Firefly entered service as a carrier-based

fighter for the Royal Navy toward the end of the war, and became a specialist in

antishipping and antisubmarine warfare. See John Rickard, Fairey Firefly -

Development and Combat, Military History Encyclopedia on the Web (Jan. 31,

2009), http://www.historyofwar.org/articles/weapons_fairey_firefly.html. Its late

birth meant there were far fewer built than the more famous Hurricanes and

Spitfires. See id. According to Kurdziel, the Firefly “first flew in ‘41” and “was

the first British airplane to fly over Japan and Tokyo in 1945 during the

[occupation] of Japan.” Later models of the Firefly operated well into the 1960s.
                                        -4-

[*4] Kurdziel first spotted a Firefly in 1974 when it was featured on the cover of

a flying magazine. Nearly 20 years later, in the fall of 1993, he learned that a

Firefly was for sale in Australia. He had to have it. “I bought it sight unseen

basically * * * I thought it was a great airplane” and “[n]obody knew what it was

in the United States.” He made a couple trips to see the Firefly in person and then

consulted with some mechanics. The Firefly he wanted had not flown for years,

possibly decades. But Kurdziel bought it for around $200,000, which he financed

by borrowing against his house for what he could not pay from his own liquid

funds. Shipping cost him an additional $60,000 as the airplane had to be shipped

from Australia. This was certainly no small investment.

      Around the same time that Kurdziel bought the Firefly, he also took “early,

early looks at trying to do something with the airplane.” His first plan was to sell

rides on the plane. He estimated the cash that this would bring in. He talked with

mechanics to reckon the cost of restoration and maintenance, and called

“insurance companies to figure out insurance if [he was] going to have people

flying it * * * for charter or training.” He also collaborated with members of the

Royal Australian Navy on a plan to restore the airplane, as both parties wanted to

see the Firefly flying again.
                                        -5-

[*5] The Firefly was 60% restored when Kurdziel bought it, but it still required a

large investment of time and money to become airworthy. It took “[e]ight years

and 45,000 man hours” to fully restore the plane, and as many as 10 full-time

workers. Beyond paying these workers, Kurdziel devoted thousands of hours to

the project himself, driving to the restoration worksite in Colorado and back twice

a month. According to him, the restoration and maintenance of the Firefly was “a

full-time job” and “takes everything you have.” As is true of almost all old planes,

there were no working spare parts available on the aftermarket. This meant

Kurdziel had to design many of the Firefly’s replacement parts himself. “I did all

the instruments, did the oxygen system. I mean, the mechanics were basically my

hands. It’s my design.”

      This was a remarkable amount and quality of work--very few planes of that

age ever get back into the sky. But Kurdziel’s Firefly took off in 2002 after it got

an “air worthiness certificate” from the Federal Aviation Administration (FAA).

For a pilot with today’s training to learn how to fly such a venerable plane is also a

remarkable achievement, and Kurdziel got the FAA to license him to fly it. To

this day, he is the only person with such a license. The Firefly soon began

winning prizes; it earned the title of grand champion in the country’s premier air

show in Oshkosh, Wisconsin, and won another at the National Aviation Heritage
                                        -6-

[*6] Invitational in Reno, Nevada. The Firefly’s fame took off, and it landed on

20 or 30 different magazine covers. See, e.g., John Sotham, The Champ: From

the Decks of World War II Aircraft Carriers to Today’s Airshow Circuit-the

Journey of a Royal Australian Navy Fairey Firefly, Air & Space Magazine (July

2003), https://www.airspacemag.com/military-aviation/the-champ-4810438/.

      B.     “Airplane Leasing” Activity

      Making money with the Firefly was more difficult. Kurdziel initially

formed Firefly, LLC, to own and operate the airplane. But in 2003, he brought it

to California and transferred its ownership to a trust to achieve more favorable

state-tax treatment. Kurdziel wanted to earn some money by flying the plane at

military air shows, which required him to learn how to become a government

contractor. He did, and in 2004 met the requirements to contract with the federal

government. These stirrings of business activity led Kurdziel to report his Firefly

income and expenses on the Schedule C, Profit or Loss From Business, of his

2005 tax return. But for both that and later tax years, Kurdziel reported that his

Firefly activity was in the business of “Airplane Leasing.” This was not true--

Kurdziel has never leased out the Firefly. But reporting his Firefly activity as a

business brought with it some big tax advantages. The great gobs of money that

the restoration had required led Kurdziel to claim an adjusted basis in the Firefly
                                         -7-

[*7] of just over $1.6 million on his 2005 return, which generated a nearly $82,000

depreciation deduction for that year alone. In total Kurdziel reported $129,230 in

total expenses related to the Firefly, and $115,280 in business loss--an amount

which reduced Kurdziel’s taxable income from other sources by more than half.

Similar Schedules C were produced in subsequent tax years on which Kurdziel

claimed over $80,000 in depreciation deductions and six-figure net losses that

greatly offset his income.

      The Firefly continued its airshow appearances and brought in some income

in most years, but this income never came close to covering even Kurdziel’s out-

of-pocket costs. And remember Kurdziel’s initial plan to earn money by selling

rides? Well, he soon learned that this was a legal impossibility due to FAA

regulations, and it remained legally impossible for all the years at issue in these

cases. Kurdziel would, however, still give free rides as they “are invaluable for

press * * * [and] the exposure[].”

      Kurdziel’s losses associated with the Firefly increased with each year at

issue. Here’s a table:
                                         -8-

 [*8]                           2007             2008        2009          2010
 Depreciation                 $82,802          $83,903     $85,077       $86,250
 Insurance                     11,976            16,300      16,300       16,300
 Legal and
  professional services            250              500       2,958          600
 Office expense                     30              168        -0-          -0-
 Rent                          10,800            10,800      11,493       12,526
 Repairs and
  maintenance                    5,534              540       1,322        1,191
 Supplies                         -0-              -0-           97               15
 Taxes and licenses                200              125        -0-           -0-
 Travel, meals, and
  entertainment                  1,917            1,242       2,766        1,292
 Other expenses1               13,317            19,687      16,020       11,480
  Total expenses              126,826          133,265     136,033       129,654
 Income                          9,685           14,400      14,000          -0-
  Net loss                   (117,141)         (118,865)   (122,033)    (129,654)

And here’s another to show how Kurdziel’s Schedules C net losses reduced his

income from other sources:




        1
        “Other expenses” listed on Kurdziel’s Schedules C include (1) annual
inspection, (2) dues and subscriptions, (3) airplane fuel and oil, (4) website,
(5) parachute packing, (6) support equipment, (7) postage delivery, and
(8) education.
                                          -9-

 [*9]                           2007            2008          2009          2010
 Income from other
  sources                    $272,832       $159,738       $176,074       $187,015
 Schedule C net losses       (117,141)      (118,865)      (122,033)      (129,654)
 Other losses:
    Rental and other
     business losses           (87,457)     (102,156)       (61,635)       (39,379)
    Net operating loss         (77,617)       (77,617)      (77,617)      (116,070)
  Total income                  (9,383)     (138,900)       (85,211)       (98,088)

        During all years at issue Kurdziel neither had a formal business plan for the

Firefly nor kept books and records or separate bank accounts for his Firefly-related

activities. He flew the Firefly in airshows until 2012, when a part failed and it

crashed while landing. Kurdziel continues to work on its repair.

        C.    Airworld LLC, Etc.

        One unusual aspect of these cases is that the Firefly is not Kurdziel’s only

putative side business. In 2006 he formed a flight-training business named

Airworld LLC. He did not transfer the Firefly to this LLC, but in a way the old

plane was the catalyst of this new business, since the Firefly had become so

popular and “people ha[d] asked [him] to do flight training.” Kurdziel reported

Airworld’s operations on Schedules E, Supplemental Income and Loss, of his
                                        - 10 -

[*10] 2007 through 2009 income tax returns, and the Commissioner allowed all

the losses that he claimed.

      Kurdziel also had other airplane-based ventures--the Airborne Tactical

Advantage Corporation (ATAC) and Strike University, an offshoot of Airworld.

Although it is no longer affiliated, he started ATAC around 1994 with three others

to provide tactical airborne training. “For the last 20 years, Airborne Tactical

Advantage Company * * * has trained Navy, Marine, Air Force and Army air-

crews, ship-crews, and Combat Controllers.” ATAC, The Company,

http://atacusa.com/atac_company.html (last visited Feb. 7, 2019). Strike

University is “a concept * * * it’s going to be a leadership school” with “very

broad applications to any kind of high-risk industry--medicine, airlines, oil and

gas, [and] mining.” Neither it nor ATAC produced any of the items that remain in

dispute in either of these cases.

II.   Audit, Petition, and Trial

      Schedules C with big losses and little income rarely fly under the IRS’s

radar. Kurdziel received a notice of deficiency for tax years 2007 through 2009, in

which the Commissioner disallowed his Schedules C and net operating loss (NOL)
                                         - 11 -

[*11] deductions and determined 20% section 6662(a)2 penalties on the alternate

grounds of negligence or disregard of rules or regulations, substantial

understatement of income tax, and substantial valuation misstatement. Following

close behind was a second notice for Kurdziel’s 2010 tax year, in which the

Commissioner disallowed the same deductions, plus a few deductions on Schedule

A, Itemized Deductions, and a loss on Kurdziel’s Schedule E, and bolted on

another section 6662(a) penalty. Kurdziel timely petitioned our Court. In his

petition he claimed that “the Commissioner erred in determining that the

petitioner’s Schedule C business * * * was not engaged in for profit” and in

determining that he was not entitled to NOL deductions.

      We tried these cases in San Diego.3 At trial Kurdziel testified that he

bought the Firefly as an investment and intends to eventually sell it for a profit.

He testified that the airplane is “basically [his] retirement” since he lost his

pension when Northwest declared bankruptcy. The Commissioner thinks this

argument won’t fly because Kurdziel never actually intended to sell the plane; and



      2
        All section references are to the Internal Revenue Code in effect for the
years at issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure, unless we say otherwise.
      3
       Kurdziel lived in California at all relevant times, which means these cases
are appealable to the Ninth Circuit. See sec. 7482(b)(1)(A).
                                        - 12 -

[*12] even if he had, the 2012 crash significantly reduced its value, making any

capital gain unlikely.

      Simon Brown, a seller of World War II aircraft, testified as an expert

witness that Kurdziel’s Firefly is worth between $3.5 and $5 million based in part

on his “visual inspection” of the airplane and the fact that he sold a different (and

unrestored) Firefly for about $400,000. He also credibly testified that using

replacement parts to repair a damaged plane would not decrease its value, but

failing to keep it in good flying condition would. Ronald Tinkham, another

experienced appraiser of vintage military aircraft, also testified as an expert

witness that Kurdziel’s Firefly could reasonably sell for over $8 million.

Tinkham, however, stressed that this was an estimate and not an official appraisal.

      Although the Commissioner determined a section 6662(a) penalty for each

year at issue, at trial he failed to introduce any evidence that he’d complied with

section 6751(b). See Graev v. Commissioner (Graev III), 149 T.C. 485, 493 n.14

(2017) (citing Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff’g in

part, rev’g in part T.C. Memo. 2015-42), supplementing and overruling in part 147

T.C. 460 (2016).
                                        - 13 -

[*13]                                 OPINION

        After concessions, we are left to answer:

        •     did Kurdziel have a profit motive in his use of the Firefly during the
              2007-10 tax years;

        •     did Kurdziel substantiate his claimed Schedule C “annual inspection”
              expenses in excess of $6,488, and any of his contested Schedule A
              itemized deductions for the 2010 tax year;

        •     did Kurdziel establish that he is entitled to NOL deductions for the
              2007-10 tax years; and

        •     is Kurdziel liable for accuracy-related penalties for tax years 2007-
              10?

We answer each question below.

I.      Profit Motive

        Section 162(a) permits deductions for “ordinary and necessary expenses

paid or incurred * * * in carrying on any trade or business.” And section 212(1)

and (2) generally allows a taxpayer to claim a deduction for all the ordinary and

necessary expenses paid or incurred “for the production or collection of income,”

and “for the management, conservation, or maintenance of property held for the

production of income.” Even if there is no trade or business, a deduction for

expenses relating to investment activities may be allowable under section 212.

See, e.g., Thomason v. Commissioner, T.C. Memo. 1997-480, 1997 WL 653894,
                                        - 14 -

[*14] at *6. But section 183(a) bars taxpayers from claiming deductions for

activities that are “not engaged in for profit,” except as provided under section

183(b).

      The test of profit motive is a subjective one--a taxpayer must show that he

undertook the challenged activity with an “actual and honest objective of making a

profit.” See Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), aff’d without

published opinion, 702 F.2d 1205 (D.C. Cir. 1983). His expectation of a profit

doesn’t have to be reasonable, but it must be genuine. See sec. 1.183-2(a), Income

Tax Regs. (“it may be sufficient that there is a small chance of making a large

profit.”); see also Elliott v. Commissioner, 90 T.C. 960, 970 (1988), aff’d without

published opinion, 899 F.2d 18 (9th Cir. 1990). And a taxpayer bears the burden

of proving his motive, which must be to make an economic profit and not just cut

his tax bill. Wolf v. Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), aff’g T.C.

Memo. 1991-212. In the Ninth Circuit, the intent to make a profit must also be the

predominant, primary, or principal motive. Id.

      Did Kurdziel intend to make a profit with the Firefly? The regulations give

us some direction. They say to use “objective standards” to discern a taxpayer’s

intent, “taking into account all of the facts and circumstances.” Sec. 1.183-2(a),

Income Tax Regs. They give us nine factors to consider, with “[n]o one factor
                                        - 15 -

[*15] [being] determinative.” Id. para. (b). They tell us that we can look at other

factors not on the list and that we should not make a determination based on the

number of factors indicating a lack of profit motive and “vice versa.” Id. The

Seventh Circuit has called this open-ended test of objective factors of subjective

intent “goofy”, and has chosen not to “wad[e] through the nine factors” but instead

to take a more holistic approach. Roberts v. Commissioner, 820 F.3d 247, 250,

254 (7th Cir. 2016), rev’g T.C. Memo. 2014-74.

      These cases, however, are appealable to the Ninth Circuit, and so the nine-

factor test it is. Here they are:

      •      the manner in which the taxpayer carries on the activity;

      •      the expertise of the taxpayer or his advisors;

      •      the time and effort expended by the taxpayer in carrying on the
             activity;

      •      the expectation that assets used in the activity may appreciate in
             value;

      •      the success of the taxpayer in carrying on other similar or dissimilar
             activities;

      •      the taxpayer’s history of income or losses with respect to the activity;

      •      the amount of profits earned, if any;

      •      the financial status of the taxpayer; and
                                        - 16 -

[*16] •      any elements of personal pleasure or recreation.

Sec. 1.183-2(b), Income Tax Regs.

      A.     Manner in Which the Activity Is Conducted

      The first factor has us look at how the taxpayer carries on the activity. It

tells us that carrying on the activity in a “businesslike manner” and “maintain[ing]

complete and accurate books and records” could indicate a profit motive. Sec.

1.183-2(b)(1), Income Tax Regs. Kurdziel had no formal business plan for the

Firefly, and maintained neither separate financial books and records nor separate

bank accounts. He had a spreadsheet with the projected expenses and “cash flow”

from selling airplane rides. He also had documents labeled “Firefly LLC Business

Plan,” “Firefly LLC Business plan for Apr 2002,” and “Firefly Yearly Operating

Expense Projected,” which state his intent to restore the Firefly, enter it in

airshows, and aid the Royal Australian Navy “in the restoration of their [sic]

Firefly to flyable condition.” This aid would in turn “create more awareness” of

his own Firefly and “increase its marketability.” We find these documents less a

business plan and more a summary of Kurdziel’s intent or hope. See Knowles v.

Commissioner, T.C. Memo. 2017-152, at *15. We also cannot be sure when

Kurdziel created these plans. There is a handwritten notation on the “Firefly LLC
                                         - 17 -

[*17] Business Plan” that says “Original Plan 1999-2000?,” which tends to show

that even its creator was unsure. The other documents do not contain dates.

        We do believe Kurdziel’s claim that his original plan was to sell rides on the

Firefly, but after he learned this was impossible he didn’t change his plans “with

an intent to improve profitability.” Sec. 1.183-2(b)(1), Income Tax Regs. He

introduced a one-page document titled “Firefly LLC Business Plan Update” with a

handwritten “2005” at the top. This update involved his plan to use the Firefly in

both Airworld and Strike University, with Strike University “just start[ing]” in

2016. But Kurdziel didn’t clarify how his purported 2005 update included a

project that didn’t start until 2016, which leads us to doubt that he drafted it back

in 2005.

        Against this close reading of Kurdziel’s private documents are the claims he

made in public filings to achieve a local property-tax exemption for the Firefly. In

those filings he asserted that he was neither using the Firefly for commercial

purposes nor holding it for sale. What’s more, considering that Kurdziel claims

that selling the Firefly has been part of his plan all along, we find it odd that he did

not have an appraisal done until 2014--even though he restored the Firefly in

2002.

        This factor weighs against Kurdziel.
                                         - 18 -

[*18] B.     Expertise of Taxpayers or Advisers

      This factor tells us that “[p]reparation for the activity by extensive study of

its accepted business, economic and scientific practices” or consultation with

experts can suggest a profit motive. Sec. 1.183-2(b)(2), Income Tax Regs. While

“a taxpayer needn’t make a formal market study in preparation for a trade or

business, he’s expected to undertake a basic investigation of the factors that would

affect his profit.” Heinbockel v. Commissioner, T.C. Memo. 2013-125, at *24-

*25 (citing Westbrook v. Commissioner, T.C. Memo. 1993-634, 1993 WL

540784, at *7, aff’d, 68 F.3d 868 (5th Cir. 1995)).

      Kurdziel’s proof of his expertise is his actual restoration of the Firefly to

flyability. We agree that this shows great expertise--indeed, one-of-a-kind-in-the-

world expertise--in aircraft restoration, but this factor points us to expertise in

making money from an activity and not just the ability to accomplish an unusually

difficult objective. We have found, however, that technical and practical

experience in a specialized field can be sufficient to make this factor fall in favor

of a taxpayer to some degree. See Barker v. Commissioner, T.C. Memo. 2012-77,

2012 WL 947134, at *5 (choosing not to question taxpayer’s expertise in

engineering or knowledge of space exploration technology given his advanced

degrees and career). The Firefly’s restoration was a huge undertaking that no ill-
                                        - 19 -

[*19] prepared person could pull off. What’s more, Kurdziel, as both an engineer

and an experienced pilot, designed many of the parts on the Firefly himself. This

shows that he knew what he was doing technically. He has also been around

airplanes for 45 years and seems to have had an interest in warbirds since at least

1993--which is when he testified that he first saw the Firefly.

      On the other hand, we have found in a number of cases that an expert’s

knowledge of an activity alone is insufficient when he failed to conduct research

or seek advice on its business aspects and profitability. See, e.g., Betts v.

Commissioner, T.C. Memo. 2010-164, 2010 WL 2990300, at *8. Without

studying an activity’s practical economics, mere technical knowledge may just

reveal a skilled hobbyist and not a businessman. See Golanty v. Commissioner,

72 T.C. 411, 432 (1979), aff’d, 647 F.2d 170 (9th Cir. 1981). The fact that

Kurdziel planned to sell rides in the Firefly when it has been illegal to do so

throughout his ownership raises a red flag. So while Kurdziel is extremely

experienced with airplanes and their restoration, we think this practical experience

is canceled out by his failure to show that he did a basic investigation into the

business aspects and economics of vintage airplane restoration.

      This factor favors the Commissioner.
                                        - 20 -

[*20] C.     Time and Effort Expended on the Activity

      “The fact that the taxpayer devotes much of his personal time and effort to

carrying on an activity, particularly if the activity does not have substantial

personal or recreational aspects, may indicate an intention to derive a profit.” Sec.

1.183-2(b)(3), Income Tax Regs. And a taxpayer’s choice to leave another job to

spend most of his time on the activity may further evidence his intention to turn a

profit. See id.; see also Metz v. Commissioner, T.C. Memo. 2015-54, at *46-*47

(taxpayers’ horse-breeding business was a full-time activity). There is no doubt

that Kurdziel devoted a significant amount of time to the Firefly, from restoration

and maintenance to training and airshows. He traveled to the restoration site in

Colorado “twice a month for eight years” and also logged thousands of hours

working on and flying the Firefly in 2007, 2008, and 2009.

      But Kurdziel’s work on the Firefly had “substantial personal or recreational

aspects,” see Dodge v. Commissioner, T.C. Memo. 1998-89, 1998 WL 88175, at

*5-*6 , aff’d without published opinion, 188 F.3d 507 (6th Cir. 1999) (skilled

riders put in a great deal of time to horse-breeding activity but also derived a

substantial recreational benefit), even given the work associated with it, see Giles

v. Commissioner, T.C. Memo. 2006-15, 2006 WL 237503, at *13 (unpleasant

tasks are often associated with a hobby). Many of the hours that Kurdziel logged
                                        - 21 -

[*21] were for personal time spent using the Firefly. He also admitted that the

Firefly was a great accomplishment for him and that he gets a “tremendous amount

of satisfaction” from flying it. That’s not to say one can’t experience satisfaction

from profitable work, see Jackson v. Commissioner, 59 T.C. 312, 317 (1972), but

because Kurdziel remained a full-time employee of Delta, we think the great

amount of time, energy, and money that he put into the Firefly is more the result of

an emotional attachment than a business, see Ballich v. Commissioner, T.C.

Memo. 1978-497.

      This factor is neutral.

      D.     Success in Carrying On Other Similar Activities

      A taxpayer’s previous success in similar activities may show that he has a

profit objective, even if the activity is currently unprofitable. See sec. 1.183-

2(b)(5), Income Tax Regs. There’s no evidence here, however, that Kurdziel was

previously successful in restoring airplanes and selling them for profit. Kurdziel

points to his past and subsequent real-estate investments as proof of his success in

historic-airplane restoration. He says that he earned the money to buy the Firefly

by buying California property and “watching the values increase.” We

acknowledge that both these activities involve the reasonable hope of appreciation

in asset values, but don’t find the link between historic-airplane restoration and
                                        - 22 -

[*22] real-estate resale so simple. And Kurdziel’s more recent investments are

still uncertain, with only an expectation of profit. This uncertainty is in fact the

only similarity to his Firefly investment, with neither yet a sure financial success.

      This factor favors the Commissioner.

      E.     History of Income or Loss

      A series of losses during the startup stage of an activity may not necessarily

indicate that an activity is not engaged in for profit. See sec. 1.183-2(b)(6),

Income Tax Regs. “However, where losses continue to be sustained beyond the

period which customarily is necessary to bring the operation to profitable status,”

losses may indicate that the activity was not undertaken for profit. Id. Kurdziel

reported losses from his Firefly-related activities beginning in 2005, and those

losses continued through the 2007-10 tax years at issue. With each passing year

his Firefly-related losses only increased, and they increased even when one

considers only cash outlays. We believe these losses continued longer than they

should have. Kurdziel completed the Firefly’s restoration in 2002 and won his

most prestigious awards that same year. If Kurdziel was interested in making a

profit (and cutting his losses), he would have sold, or at least attempted a sale

much sooner--especially after he learned that monetizing rides was impossible.

      This factor favors the Commissioner.
                                         - 23 -

[*23] F.     Amount of Occasional Profits, if Any

      Occasional profits can show a profit motive, but the size and frequency of

profits relative to losses are what matter. See sec. 1.183-2(b)(7), Income Tax

Regs. And “[a]n occasional small profit from an activity generating large losses,

or from an activity in which the taxpayer has made a large investment, would not

generally be determinative that the activity is engaged in for profit.” Id.

Kurdziel’s income from his Firefly-related activities is solely attributable to the

“occasional” and “small” payments he received from his airshow appearances.

These payments never exceeded even his insurance costs, and nothing in the

record hints at the way the Firefly could ever become a profitable operating

business.

      This factor favors the Commissioner.

      G.     Taxpayer’s Financial Status

      A taxpayer’s lack of “substantial income or capital from sources other than

the activity [at issue] may indicate that [the] activity is engaged in for profit.” Sec.

1.183-2(b)(8), Income Tax Regs. Kurdziel claims that because his retirement

savings suffered when Northwest merged with Delta, and because the value of the

Firefly “makes him a millionaire,” his Firefly activities should be seen as his main

source of income. But even assuming his retirement savings suffered, we cannot
                                        - 24 -

[*24] ignore the fact that he received retirement pay from the U.S. Navy and a

substantial average annual income of over $180,000 from Delta during the years at

issue. Kurdziel’s Firefly-related activities never produced a profit during any of

the years at issue, and his losses increased each year. We find it more likely than

not that Kurdziel had come to use the Firefly not as a source of income, but rather

as a way to significantly reduce his taxable income from other sources. See

Rowden v. Commissioner, T.C. Memo. 2009-41, 2009 WL 415601, at *7

(“Substantial income from sources other than the activity (especially if the losses

from the activity generate substantial tax benefits) may indicate a lack of profit

motive”).

      This factor weighs heavily in favor of the Commissioner.

      H.     Elements of Personal Pleasure or Recreation

      “The presence of personal motives in carrying on of an activity may indicate

that the activity is not engaged in for profit, especially where there are recreational

or personal elements involved.” Sec. 1.183-2(b)(9), Income Tax Regs. Kurdziel

contends that while flying and working on the Firefly is satisfying, it is a “full-

time job” that “takes everything you have.” But many hobbies can take a lot of

time and energy while still being mostly a source of personal recreation. See

Betts, 2010 WL 2990300, at *9. And we have found a for-profit activity even
                                        - 25 -

[*25] where the taxpayer clearly enjoys what he is doing but limits his personal

use of business assets. See Pryor v. Commissioner, T.C. Memo. 1991-109

(taxpayer “clearly enjoy[ed] sailing” but limited his personal use of his boat to just

five days during the years at issue); see also Dickson v. Commissioner, T.C.

Memo. 1983-723 (taxpayer greatly enjoyed sailing but only did so 7 to 10 times

during the years at issue). Kurdziel offered evidence of his “personal hours spent”

with the Firefly (both working on it and flying it) during 2007-09--1,200.5 hours

in 2007, 1,041.5 hours in 2008, and 544.5 hours in 2009.

      Beyond this, we agree with the Commissioner that the Firefly brought

Kurdziel a good deal of fame and became closely linked to his social life. He got

a tremendous amount of satisfaction from flying the Firefly, showing off its

restoration, and being the only person in the country qualified to fly it.

      This factor favors the Commissioner.

      I.     Expectation That Assets Used in Activity May Appreciate in Value

      An expectation that assets will appreciate in value can suggest a profit

motive even if the taxpayer derives no profit from his current operations. See sec.

1.183-2(b)(4), Income Tax Regs. But before determining whether a taxpayer

expected his assets to appreciate in value, we must first determine whether the

assets in question are part of the activity at issue. See sec. 1.183-1(d)(1), Income
                                        - 26 -

[*26] Tax Regs.; see also Engdahl v. Commissioner, 72 T.C. 659, 668 n.4 (1979)

(holding that land and horse-related activities were a single activity for purposes

of determining appreciation of assets under section 1.183-2(b)(4), Income Tax

Regs.).

      Neither party specifically addressed whether Kurdziel’s ownership of the

Firefly as an investment is separate from his airshow activities. But as far as we

can tell, the airshows--if attended with a profit motive at all--were really just a way

to showcase the Firefly; he didn’t go to them primarily for the relatively small

appearance fees. Kurdziel even testified that his goal in attending these shows

was to increase the Firefly’s value. It seems to us that Kurdziel’s only reasonable

chance of making a profit was to hold the Firefly in hopes that its value would

increase before sale. So we’ll consider his holding the Firefly and showing it at

exhibitions as a single activity under section 183 because of their nearly

inextricable “organizational and economic interrelationship.” Sec. 1.183-1(d)(1),

Income Tax Regs.

      We can infer a profit motive here only if Kurdziel expected that the Firefly’s

appreciation would exceed its operating expenses, such that the eventual gain on

sale would allow him to recoup his losses. See Bronson v. Commissioner, T.C.

Memo. 2012-17, 2012 WL 129803, at *8, aff’d, 591 F. App’x 625 (9th Cir.
                                        - 27 -

[*27] 2015); sec. 1.183-2(b)(4), Income Tax Regs. At trial the lowest values

presented by Kurdziel’s experts were $3.5 million and $8 million, respectively,

provided that the Firefly was kept “in excellent flying condition.” Both experts

also believed that vintage aircrafts were only increasing in value. One even sold a

Firefly in prerestoration condition for nearly $400,000 in 2013 and testified that it

would take $4 to $5 million more to get it in the condition of Kurdziel’s Firefly.

And while one expert didn’t think Kurdziel’s use of “replacement parts” to repair

the Firefly after its 2012 crash would materially affect its value, both experts

testified that planes deteriorate and lose value rapidly if they are not flown

regularly.

      The Commissioner emphasized that the Firefly became unairworthy in 2012

after its crash and remained grounded at the time of trial. That means that the

Firefly was grounded for roughly four years, during which time its value probably

decreased significantly. During the years at issue, however, the Firefly had not yet

crashed and was airworthy, likely placing it within the experts’ $3.5 to $8 million

ballpark. So while Kurdziel did not have the Firefly appraised during this time,

we think he was aware of its increasing value because of his exposure to experts in

the vintage-warcraft field and the nearly $1.9 million he put into its restoration.
                                         - 28 -

[*28] We therefore find that he had an expectation that he would cover his

accumulated losses if he sold the Firefly.

      This factor favors Kurdziel.

      J.     Conclusion

      Even having concluded that Kurdziel expected the Firefly to appreciate,

what ultimately matters is whether he had a good-faith plan to realize a profit from

its sale. See Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), aff’d, 379 F.2d

252 (2d Cir. 1967). We aren’t convinced that he did. The regulations tell us that

no one factor is more important than another. See sec. 1.183-2(b), Income Tax

Regs. The expectation that the Firefly will appreciate in value is important here

because a sale is the only true way Kurdziel could turn a profit. But this doesn’t

make the other factors less weighty, since together they signal whether he ever

intended in good faith to make a profit. And appreciation does little to help

Kurdziel’s case if we find that his work on the Firefly was personal. See Barter v.

Commissioner, T.C. Memo. 1991-124, aff’d without published opinion, 980 F.2d

736 (9th Cir. 1992).

      Kurdziel’s argument that he intended to hold the Firefly for investment all

along is contrary to much of the evidence. His business plan was unclear from the

start: Was he leasing the airplane, selling rides on it, or entering it in airshows to
                                          - 29 -

[*29] promote it? Even more troubling is that Kurdziel chose to list his Firefly

activities as “airplane leasing” when he never once leased the Firefly out, and was

aware that he couldn’t legally sell rides on it. This knowledge also colors our

view of his early business plans. We therefore do not find his updated plans to

hold the Firefly for an investment to be credible. What’s more, we find it hard to

believe that Kurdziel intended to sell the Firefly all along when he didn’t have a

formal appraisal--if we can call it that--done before 2014, and admitted on his

California property tax documents that he was not holding it for sale or for profit.

      Even for a court like the Seventh Circuit that doesn’t slavishly follow the

regulation’s factors, see Roberts, 820 F.3d at 250, 254, a “holistic” approach

would land in the same place. Given the risks that Kurdziel admitted are

associated with flying the Firefly, we find it suspect that he didn’t try to sell it.

We can reasonably see him holding the Firefly for a few years after restoration to

enter airshows and increase exposure. But Kurdziel didn’t seem to even think of

selling it in the years before us, and affirmatively represented to local tax

authorities that he didn’t intend to do so.

      He instead continued to hold the plane for nearly 15 years after its

restoration was complete and it was awarded grand champion titles--a time when it

was arguably at its most valuable--all while using the considerable expenses of its
                                        - 30 -

[*30] upkeep to offset his significant other income. As a result, a “holistic”

analysis would reach the same result as the application of the nonexclusive list of

factors test--the conclusion that it is more likely than not that Kurdziel did not

engage in his Firefly-related activities for profit within the meaning of section 183.

He is therefore not entitled to deduct his expenses in excess of gross income from

the activity.

II.    Substantiation

       Whether the Firefly restoration and maintenance was a profit-seeking

activity is the big issue, but the parties also dispute whether Kurdziel substantiated

certain deductions. These disputed deductions include Kurdziel’s 2010 “annual

inspection” expenses listed on his Schedule C and several Schedule A deductions.

       A.       2010 Schedule C Annual Inspection Expenses

       As an alternative to his not-for-profit activity argument, the Commissioner

allowed Kurdziel to deduct $6,488 in “annual inspection” expenses for 2010 but

disallowed the rest, arguing that they lack a business purpose. The disallowed

expenses include a $1,000 cash withdrawal that Kurdziel claims he paid to a

friend, Tom Haug, relating to the Firefly’s 2010 annual inspection, as well as some

meal and other expenses. The Commissioner says that Kurdziel failed to explain

Haug’s relation to the inspection and failed to introduce evidence that any such
                                        - 31 -

[*31] payment was actually made. He also says that the meals were not limited to

50% of their cost, see sec. 274(n), and points to section 262 to disallow the other

expenses as personal.

      We can break off this attack with the observation that Kurdziel reported

zero gross income from his Firefly-related activities for 2010, and therefore can’t

claim any related deductions. See sec. 183(b)(2) (limiting deductions from gross

income where the deductions arise from an activity not engaged in for profit); see

also Kinney v. Commissioner, T.C. Memo. 2008-287, 2008 WL 5330815, at *7

(“Given the section 183(b)(2) limitation, we do not need to address whether

petitioners substantiated other deductions”).

      B.     2010 Schedule A Deductions

      The deductions in dispute on Kurdziel’s 2010 Schedule A are for

unreimbursed employee business expenses relating to his employment as an airline

pilot--the costs of Kurdziel’s travel, personal vehicle, and parking--home

mortgage interest, real estate taxes, and tax preparation fees.
                                        - 32 -

[*32]         1.    Employee Business Expenses

        These expenses are for meals and travel and total nearly $19,000.4 Section

162(a) allows a deduction for all ordinary and necessary business expenses.

Section 274(d) tacks more stringent substantiation requirements onto section 162

in cases where the line between personal and business expenses is blurred. This

higher hurdle affects expenses for entertainment, meals, and lodging. Secs.

274(d)(1), 280F(d)(4); sec. 1.274-2(b)(1), Income Tax Regs. And when such

expenses are at issue, taxpayers must present adequate records sufficient to

establish (1) the amount of the expense, (2) the time and place of the expense,

(3) the business purpose of the expenditure, and (4) the business relationship to

the taxpayer of each expenditure. Sec. 274(d) (flush language); sec. 1.274-

5T(b)(3), (6), Temporary Income Tax Regs., 50 Fed. Reg. 46015, 46016 (Nov. 6,

1985).

        Adequate records may come in the form of an account book, a diary, a log, a

statement of expenses, trip sheets, etc.--basically any documentary evidence

sufficient to establish each element of an expenditure or use. See sec. 1.274-

5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

        4
       On his 2010 Schedule A, Kurdziel claimed a $30,822 unreimbursed
employee business expense deduction, of which the Commissioner allowed
$11,869 for meal and entertainment expenses.
                                        - 33 -

[*33] But section 274 bars us from estimating such expenses. Id. para. (a)(4), 50

Fed. Reg. 46014.

      The Commissioner argues that Kurdziel’s claimed vehicle, parking, and

travel expenses--for trips made from his home in San Diego to Delta’s flight hub

in Detroit--are nondeductible because they were commuting expenses. He also

argues that Kurdziel’s vehicle expenses fail to comply with section 274(d)’s strict

substantiation requirements. Kurdziel argues that the Commissioner conceded this

issue. But what the Commissioner conceded was only some of these expenses.

See supra note 4. Kurdziel did offer a list of these expenses, but they only bolster

the Commissioner’s argument that he was trying to deduct commuting expenses.

      The Supreme Court has explained that such expenses are not deductible

because the taxpayer makes a personal decision as to where he lives. See

Commissioner v. Flowers, 326 U.S. 465, 473-74 (1946). In Flowers, the taxpayer

was a resident of Jackson, Mississippi who decided to continue to live in Jackson

after he accepted a job in Mobile, Alabama. Id. The taxpayer was not allowed to

deduct the costs of his travel despite the distance, because the costs were

personal. Id. There are three exceptions to this general rule of nonduductibility:

(1) if the residence is a taxpayer’s principal place of business and he travels to

another place of business, (2) if the taxpayer has one or more regular work
                                         - 34 -

[*34] locations away from his residence, and (3) if a taxpayer travels to a

temporary work location. See Bogue v. Commissioner, T.C. Memo. 2011-164,

2011 WL 2709818, at *6, aff’d, 522 F. App’x 169 (3d Cir. 2013).

      We find that none of these exceptions applies. Detroit is Kurdziel’s

permanent work base--there is nothing temporary about it--and Kurdziel has

chosen to live in San Diego. There are, however, a handful of charges on

Kurdziel’s list that are for travel to different locations: Minneapolis, Ontario, Los

Angeles, Miramar, and Reno. The second exception, for travel to more then one

“regular work locations,” allows a deduction for a taxpayer who has one or more

regular work locations. See Rev. Rul. 99-7, 1999-1 C.B. 361. Kurdziel, however,

spent only one or two nights in cities other than Detroit, and we don’t find that

“regular” enough to fall within this exception.

      The last exception allows a deduction for “daily transportation expenses

incurred in going between the taxpayer’s residence and a temporary work location

outside the metropolitan area where the taxpayer lives and normally works.” Id.

Even if we think this exception could apply, we have no way of knowing whether

Kurdziel traveled directly from his residence in San Diego to one of the non-

Detroit locations based on the list of expenses he’s produced. The Commissioner

is correct that the list by itself is unreliable, and Kurdziel even admitted that it
                                        - 35 -

[*35] included some personal expenses. This is not enough. We agree with the

Commissioner’s disallowance.

              2.    Home Mortgage Interest, Real Estate Taxes, and Tax
                    Preparation Fees

       There are three other disputed deductions: home-mortgage interest, real-

estate taxes, and tax-preparation fees. The Commissioner argues, “it is not

contested that petitioner failed to substantiate his claimed real estate taxes

deduction, home mortgage interest deduction, and tax preparation fee deduction.”

       Home mortgage and real-estate tax: The Code generally allows a

deduction for all interest paid or accrued within the taxable year on a qualified

residence. See sec. 163(a), (h)(2)(D). On Kurdziel’s 2010 return he claimed a

home-mortgage interest deduction of $64,688. Only $1,725 of that amount

remains in dispute. Kurdziel also claimed a real-estate tax deduction of $9,411,

which the Commissioner allowed to the extent of $7,500. This means $1,911 is

still in dispute.

       The Commissioner says that Kurdziel failed to substantiate these

deductions--and that is about all he says. There’s nothing else in his answer,

amended answer, or pretrial memorandum, and he barely addressed them in his

posttrial brief. Kurdziel didn’t add much more: When we asked his attorney
                                       - 36 -

[*36] about the home-mortgage interest deduction at trial, he replied, “I don’t

think we addressed that.”

       When there’s nothing in the record, defeat comes for the party with the

burden of proof. See sec. 7491(a). That’s Kurdziel, so we find for the

Commissioner on these disputed amounts.

       Tax-preparation fees: A taxpayer may deduct the cost of preparing his tax

returns. See sec. 1.212-1(l), Income Tax Regs. Kurdziel claimed this expense was

$800 on Schedule A of his 2010 return. Kurdziel said at trial that his proof would

be in evidence, but all we can find is a June 2010 bank statement that shows a

check for $800. We have nothing beyond that to show this payment was for tax

preparation, and Kurdziel’s testimony was likewise unhelpful. We also disallow

this deduction.

III.   Net Operating Losses

       The final disputed deductions are the NOLs that Kurdziel carried forward to

his 2007-10 tax returns.

       NOLs are the excess of deductions allowed over gross income, and are

permitted by section 172(a). Both parties agree that the deductibility of Kurdziel’s

NOLs hinges on our finding he had a profit motive for his Firefly activities. Since

we found that Kurdziel did not, we deny his NOL deductions for all years at issue.
                                         - 37 -

[*37] IV.    Section 6662(a) Penalties

      The Commissioner determined section 6662(a) penalties against Kurdziel

for 2007, 2008, 2009, and 2010. Section 6662 imposes a 20% penalty on

underpayments of tax due to either a substantial understatement, see sec.

6662(b)(2), (d), or negligence or disregard of the rules or regulations, see sec.

6662(b)(1), (c). And when a taxpayer is an individual, the Commissioner has the

initial burden of production for penalties. See sec. 7491(c).

      The Commissioner argues that Kurdziel is subject to a substantial-

understatement penalty only for the 2007 and 2010 tax years. He meets part of his

burden for these years because Kurdziel’s understatements are both more than

$5,000 and more than 10% of the tax he should’ve reported for each of these

years. See sec. 6662(d)(1)(A).

      The Commissioner also argues that Kurdziel is subject to a negligence

penalty, but this time for each of the years at issue. He meets part of his burden to

establish negligence because he showed that Kurdziel “fail[ed] to make a

reasonable attempt to comply with the provisions of the internal revenue laws,”

sec. 1.6662-3(b)(1), Income Tax Regs., by misrepresenting his not-for-profit

activities as an “airplane leasing” business. This reporting position allowed
                                        - 38 -

[*38] Kurdziel to achieve large, income-offsetting deductions that were “too good

to be true.” Id. subdiv. (ii).

       Kurdziel argues that he doesn’t owe penalties for any of the years at issue

because his losses are “real” and he acted with reasonable cause and in good faith

by reporting his Firefly activities on his Schedules C in accordance with the

plane’s ownership and operation. See sec. 6664(c)(1); see also sec. 1.6664-

4(b)(1), Income Tax Regs. He says that he listed the activities as “airplane

leasing” since the Firefly is owned by a trust, which in turn leases it out to the

Firefly LLC. This may make sense on some level, but the fact is that this

representation is misleading, especially given that Schedule C’s Line A asks for

the “[p]rincipal business or profession, including product or service (see

instructions).”5 If Kurdziel wasn’t sure what to put in order to show that he was

really only holding the Firefly for appreciation, there were numerous ways he

could have made this more clear, e.g., attaching a supporting statement or even

just listing “holding airplane as investment.” Kurdziel’s reporting position only

reinforces our finding that he didn’t have a profit motive. We therefore don’t

believe he has shown good faith or reasonable cause.

       5
        The 2010 instructions for Schedule C specify: “Describe the business or
professional activity that provided your principal source of income * * * . Give
the general field or activity and the type of product or service.”
                                         - 39 -

[*39] But the Commissioner committed a Graev error. Part of the

Commissioner’s burden of production on the penalties at issue here is showing

that they were “personally approved (in writing) by the immediate supervisor of

the individual making such determination.” Sec. 6751(b)(1); see Graev III, 149

T.C. at 493; see also Ford v. Commissioner, T.C. Memo. 2018-8, at *6, aff’d, 751

F. App’x 843 (6th Cir. 2018). He didn’t introduce any evidence of such approval

at trial despite the fact that Kurdziel placed penalties at issue. Thus, the

Commissioner did not meet his burden of production, and Kurdziel is for this

reason alone not liable for the accuracy-related penalties determined against him

for 2007-10.

      With no outright victor,


                                                  Decisions will be entered under

                                        Rule 155.
