You will run into the strangest people if you hang out in Tax Court decisions, but I would never have expected to see Leisure Suit Larry. He appears right in the opening remarks of the decision in the case of Edmond Audrey Heinbockel and Lydia Rose Heinbockel , as background on the petitioners:
Before Grand Theft Auto, before World of Warcraft, before even Sonic the Hedgehog, Leisure Suit Larry left the Land of the Lounge Lizards to become the unlikely hero of an incredibly successful seven-game series (e.g., Leisure Suit Larry Goes Looking For Love (in Several Wrong Places)) that created a cultlike following. Larry was born and grew to immaturity at a software company called Sierra On-line, and Ed Heinbockel was Sierra’s CFO. Although Ed modestly called Larry a “warped idea”, Sierra’s enormous success in the early days of video games clearly took some entrepreneurial skill. And this Ed showed at an early age. He graduated from Cal Poly-San Luis Obispo in 1980 with a degree in mechanized agriculture, but went back to his alma mater in the mid-80s to improve his business acumen—earning his MBA from Cal Poly-SLO. After a successful five-year run at Sierra—and at about the same time that Larry’s colleague, Passionate Patti, was Doing a Little Undercover Work—Ed cashed out his Sierra stock and formed Tsunami Media, Inc.
Nice trip down memory lane to the Middle Ages of computer games. Unlike the earliest games, like Pong, the games in the late eighties had graphics beyond straight lines and dots, although they still left a bit to be desired.
You might note that the excerpt from the opinion is on the witty side. That is the work of Judge Mark V. Holmes, whom Lew Taishoff calls “the judge who writes like a person”. Judge Holmes even brings wit to his footnotes:
1. Seven-game series for now. We take judicial notice that Leisure Suit Larry: Reloaded is set to be released on the world in the very near future
Witty as he is, Judge Holmes does not embed videos in his decisions. You have to turn to tax bloggers for that.
The Heinbockels, as serial entrepreneurs, had a fairly complicated return, that led to a complicated audit that resulted in a rather lengthy opinion. There were three large issues, the proper treatment of expenses relative to a loan that Ms. Heinbockel made to her brother, a grape farm and a one-plane transportation service. The airplane is the part that interests me most as it was a Section 183 (hobby loss) issue.
Mr. Heinbockel’s business efforts during the audit period were mainly focused on Visual Purple LLC, which produces training simulations for, among others, Homeland Security. Mr. Heinbockel’s plan for his aviation venture “Collective Flight” counted on VP as being its primary customer.
Collective Flight never really got off the ground. As Ed put it, his “best-laid plans didn’t work out so well.” Although Ed occasionally flew the plane to transport himself for VP-related trips, he typically used commercial airlines. When Ed did use his own plane, he often decided against having VP reimburse Collective Flight because of VP’s cashflow problems. And Ed never did find any other revenue sources to lift Collective Flight closer to profitability. He was unable to convince any of his other contacts to become clients because, according to Ed, they were looking to fly in a nicer twin, cabin-class airplane.
If Mr. Heinbockel had been the sole owner of VP, he might have been able to make the whole thing work. He had investors to deal with and the company’s cash flow was not that strong, so he was unable to bill the company enough to serve as Collective Flight’s flagship customer. All in all, the 183 case looked pretty hopeless, but there is one point that I find of particular interest.
There was also no evidence that Ed had any discussions with lawyers, accountants, or any other aircraft experts or advisers about the potential profitability of the aircraft. Ed relied on his intuition, believing that VP—a company he controlled—could help him “make a little money with this * * * and have some fun at the same time.” This, too, weighs against finding a profit motive.
This is a common, often damning criticism, in Section 183 cases and, in the case of entrepreneurs like Mr. Heinbockel, it is entirely misplaced. What would it be like if Mr. Heinbockel had come to me or, even worse, one of my former partners in 1985 ?
I can imagine one of them telling me the story “You wouldn’t believe it, Pete. This guy comes in and he tells me that he is going to make a video game.” I reply that that is getting to be a big business now. I know this because my buddy Mikey and I always go to the Dream Machine and drop quarters into Spy Hunter on our dinner breaks during tax season.
“I know, I know, but listen to what the game is about. It’s about a forty-year-old guy going to discos and not getting laid.” I agree that it seems kind of stupid. Too much like real life. “It gets even better, though. He thinks that in the long run, he’ll be making training simulators for the FBI and groups like that.” Now that is really crazy. Lots of guys in the FBI come from Jesuit Colleges. They learned how not to get laid in Catholic grammar school, they don’t need a computer program for that. “No. No. The FBI stuff is from a submarine game.” The FBI has submarines? “Anyway, I told the guy we were kind of busy and probably couldn’t help him”.
Accountants actually do provide value to entrepreneurs, but many of us are lacking in “the vision thing”. It is not reasonable to chide someone who has succeeded in improbable ventures for not asking “experts” whether a business scheme is feasible or not.
There is a lot more to the case and I really want you to believe me when I tell you it is a good read. There are a few more characteristic Judge Holmes bon mots sprinkled throughout.
Lew Taishoff also covered this case with a focus on the writing style of Judge Holmes. Mr. Taishoff thinks that the judge may have slid too far into colloquialism:
But for want of better subject for a rant, I again deplore Judge Holmes’ war on the partitive genitive: c’mon Judge, a Harvard Law graduate perpetrating solecisms like “making a couple loans to one’s brother” (2013 T. C. Memo. 125, at p. 32), and “no more than a couple hundred dollars“ (2013 T. C. Memo. 125, at p. 57) crosses the line from colloquial to illiterate.
Like I always sez, youse guys can follow me on twitter @peterreillycpa.