F. Lee Bailey once had fame as an attorney like a rock star. His name is no longer a popular synonym for “awesome lawyer,” so maybe that’s why he decided to see whether he should try his hand at tax litigation.
He certainly chose a difficult case — his own. The IRS was after him on several issues, the biggest of which was an attempt to tax him on client funds that he was holding (long story involving a foreign fugitive). The IRS wanted to tax him on about $5.9 millions of funds on the grounds that it was available for his personal use. The Tax Court assessed him on about $450,000 of the funds that he “wrongly appropriated” and later repaid.
Mr. Bailey did less well on the hobby loss portion of his case. He failed to convince the judge that his custom-built yacht was a “for-profit” activity. One of the elements of the “hobby loss” tests is whether the taxpayer derives personal pleasure from the activity. Mr. Bailey said the yacht was just no fun. From the Tax Court opinion:
The Commissioner contends that Mr. Bailey took a great deal of personal pleasure from sailing on the Spellbound with his family and friends, but Mr. Bailey claims that “[i]t’s no fun to drive a boat”. Mr. Bailey testified that the steering wheel and navigational instruments of the Spellbound are isolated from the rest of the deck, and the pilot is therefore isolated from the party-goers on the deck.
While it may be true that Mr. Bailey did not enjoy piloting the yacht, the record belies the claim that he derived no personal pleasure from it. First, the Spellbound was built to Mr. Bailey’s specifications, and he testified that it was beautiful. Second, the record does not show that Mr. Bailey always took on the job of piloting the Spellbound. PBR hired a captain and crew to sail and maintain the Spellbound, and Mr. Bailey could have used their services to pilot the yacht any number of times. Even assuming arguendo that Mr. Bailey piloted the Spellbound on every personal trip–and that he disliked the task–we find that he derived pleasure from sharing the yacht with his family and friends and that he anticipated doing so when he purchased the yacht in 1989.
This factor–elements of personal pleasure–is in the Commissioner’s favor.
The 143-page opinion covers over a dozen different tax disputes the famous litigator had with the IRS, with the IRS prevailing on most of them, to the point that the court upheld an accuracy-related penalty
Peter J. Reilly has much more.
Update: The TaxProf also has more.
Cite: Bailey, T.C. Memo 2012-96