Originally published on Forbes.com Aug 25th, 2014
Having recreational vehicles considered dwellings for tax purposes is probably, more often than not, a taxpayer-friendly position. It makes the interest to acquire such vehicles potentially deductible as residence interest, which is handy, since a really nice motor home can cost more than most houses. Dellward and Judith Jackson, however, found the downside of RVs being treated as dwellings in their recent Tax Court decision. That would be Code Section 280A, for you tax geeks. For the rest of you, a bit of background is in order.
Until he retired in 2011, Mr. Jackson owned and operated Dell Jackson Insurance Services. Mrs. Jackson was also active in the insurance firm both as an agent and office manager. They sold several different types of insurance including life, disability, health, and homeowners. Beginning in 2004, they began selling specialized RV insurance. Previously they had sold auto insurance that covered some RVs, but they recognized that traditional insurance products were not really suitable for high-end RVs.
Turning Pleasure Into Business
Focusing on RV insurance gave them an opportunity to combine their avocation with their vocation. Since 1995. the Jacksons had been members of the Family Motor Coach Association. Various clubs that are affiliated with FMCA hold rallies which are largely social events.
A rally would usually start on Friday afternoon, and the participants would hold a potluck dinner that night. On Saturday, after a breakfast provided by the “trail boss”, the club would have an information session, often about RV maintenance issues. Only RV owners may attend these rallies. Ownership is similarly required by certain RV parks. Some parks also prohibit RVs older than a certain age. During the years at issue petitioners were members of the Gold Diggers and the Goldengate club chapters. They remained members of these two chapters at least up to the time of trial.
What’s a social get together without somebody there selling insurance? I guess the thinking was something like that. At any rate, beginning in 2004, the Jacksons began using the rallies as a marketing opportunity.
Petitioners would gather sales leads at every rally. To that end, petitioners had a banner that they attached to their RV advertising Dell Jackson Insurance. Petitioners would set up an information table outside of their RV or outside the clubhouse, if the site had one. If they set up a table by a clubhouse, petitioners moved the banner from the RV to the table. Otherwise, the sign remained on the RV from the time they arrived until the time they left. Petitioners would invite potential customers to come to their RV, and they would sit either outside or inside the RV and discuss the prospective client’s insurance needs. It would often take months, if not years, for a relationship with a potential customer, which could begin with a lead, to develop into an actual sale.
Petitioners would gather information from potential clients. When they returned to the office after the weekend, they would use that information to generate rate quotes. They would bring the quotes, policies, and other data to the next rally. Clients would review and sign policies in petitioners’ or their own RVs. Petitioners did not limit their sales at the rallies to RV insurance; they sold all types of policies.
The Tax Dispute
As you might imagine, the IRS and the Jacksons had differing views on how deductible the expenses for their RV were. They were facing deficiency notices totaling around $50,000 including penalties for the years 2006 and 2007. A lot of times a case like this turns on documentation, with taxpayers coming up short in that area. The Tax Court approved of the Jackson’s logs for the year 2007, but thought the came up short for 2006. The Court was also dismissive of the IRS concern that the gross business receipts attributable to working the RV circuit were relatively meager.
Nevertheless, there is no doubt that petitioners actively sold insurance policies during their time at the rallies and that their business activities generated not-insignificant revenue. While respondent seems to emphasize the meager gross receipts compared to the significant capital outlay, petitioners’ gross receipts from the rallies steadily increased each year, tripling in the four years after they began conducting business at RV rallies. Many businesses incur a loss in their early years while they are spooling up, establishing their reputation, and acquiring a customer base. In the insurance business, this is very important because of renewal commissions, and the value of the book of continuing business adds to goodwill and the market price of the insurance agency.
So it seemed like the Jacksons might have been headed to at least a partial victory, till the Tax Court brought in the killer section.
280A Using A Home
The question is then whether petitioners used the RV for personal purposes for more than 14 days. “Personal purposes” is also a defined term, and a “taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used *** for personal purposes by the taxpayer” Sec. 280A(d)(2) (emphasis added). Our finding above that petitioners had some personal use of the RV is fatal to their position. Any personal use, including watching TV in the RV, makes the entire day a personal day. Petitioners therefore used the RV as a dwelling unit for personal purposes for more than 14 days, and section 280A prohibits them from taking any deductions with respect to the RV. — (Emphasis added)
The Court gave them a tad of sympathy.
This result may seem harsh, but it is the operation of the statute, which reflects Congress’ desire to prevent taxpayers from deducting personal expenses as business expenses. In enacting section 280A, Congress wished to prevent taxpayers from deducting costs associated with their personal residences as well as vacation homes.
And The Penalties
Nonetheless, even the accuracy penalty was upheld.
Petitioners took deductions contrary to the plain language of the statute, and they have not alleged a misunderstanding of section 280A. Nor do petitioners allege that they relied on a professional, such as their certified public accountant, whom they did not call to testify at trial, for tax advice. Petitioners introduced no evidence as to their accountant’s qualifications, the nature of his advice, if any, as to the RV deduction, or their reliance on any of that advice. The only testimony was that petitioners provided their accountant with the raw numbers and he calculated the tax from those numbers and prepared the tax returns. Consequently, the exception for reasonable cause does not apply here, and petitioners are liable for the accuracy-related penalties.
The Jacksons were represented, so I find it a little odd that there was not more of a defense on the penalty. There were a couple of missteps by counsel mentioned in the footnotes, which made me wonder if he was a rookie, but I found there are at least a dozen decisions that include his name, which you won’t be getting from me.
Better Lucky Than Good
Although I understand the Tax Court and IRS reasoning, to be totally honest, I think that I might have blown this one. You are driving your RV to the RV rallies to sell RV insurance. Seems logical to me. If I had done their return, I would have been in Tax Court falling on my sword to save my clients eight grand.
The other evil thought that crossed my mind is that if the Jacksons had taken the kitchen out of their RV, that might have taken it out of the definition of “dwelling unit” – ” the term “dwelling unit” includes a house, apartment, condominium, mobile home, boat, or similar property, which provides basic living accommodations such as sleeping space, toilet, and cooking facilities”. Don’t know if that would have worked, but it would have made an interesting discussion.
Other Coverage
There is some discussion on RV.Net as to how broad the consequences of this case might be. Joe Kristan, like me, is annoyed at the IRS asserting accuracy penalties. Joe suggests that they might have made it work if they had rented hotel rooms, but given the Tax Court “watching TV” comment, I’m not sure about that.