Tax Code’s Strict Rules Regarding Recreational Vehicles Stop Taxpayers’ Business Deductions

Sometimes, converting a beloved avocation into a business opportunity can be a master stroke. One California couple likely thought so when they began traveling to recreational vehicle events to sell RV insurance policies. Unfortunately, they could not deduct the expenses they incurred on their own RV because of the rules in the tax code. The US Tax Court upheld the Internal Revenue Service’s deficiency ruling because, under the tax code’s strict rules, the RV was a dwelling, and the couple used it for personal purposes for more than the allotted 14 days.

Dellward Jackson owned and operated an insurance brokerage for three decades before retiring in 2011. In the mid 1990s, the couple had joined an RV club. Around 2004, Jackson’s company began selling RV-specific insurance policies, which they sold at RV rallies. Jackson and his wife, who also worked for the agency, purchased a new Winnebago around that time. The Jacksons would travel to rallies in their Winnebago, set up a table at the event, and collect sales leads of potential buyers of their RV insurance policies. The couple claimed that 100% of their use of the 2004 Winnebago in 2006 was for business. The next year, they purchased a new Winnebago and claimed that 99.95% of its use was for business. The couple had detailed logs regarding their trips and business activities in 2007. The couple took business expense deductions related to the RVs in 2006 and 2007. The IRS rejected the deductions, contending that the vehicles were personal, not business items.

The Tax Court upheld the IRS decision. The couple’s 2006 return suffered from failing to satisfy Section 274(d), which requires taxpayers to substantiate the validity of their tax deductions regarding certain pieces of property. These types of property include items used for transportation, including RVs. For their 2006 return, the couple had only affidavits in support of the deductions they claimed. Since the couple lacked any other documentation to corroborate what they put in their affidavits, this proof was not enough to meet the hurdle Section 274(d) establishes.

The Jacksons’ 2007 documentation was much more extensive. They contemporaneously maintained a calendar where they logged their trips and also detailed the types of conversations they had with potential clients. This was enough to corroborate the taxpayers’ own testimony and show the existence of a business purpose.

Unfortunately for the Jacksons, their deductions still could not survive, even those from 2007. The IRS considers RVs as dwellings in some circumstances, as defined by Section 280A of the code. An RV becomes a dwelling if the vehicle is used for personal ends for more than either 10 percent of the time rented (in the case of a rental) or 14 days. If a taxpayer uses a dwelling unit for personal purposes at any point during the day, the statute defines that as a personal day. This could be as innocuous as watching a program on the RV’s television.

Based on the evidence in the case, the court concluded that the Jacksons used their RV for personal purposes for more than 14 days in each of 2006 and 2007. As a result, the taxpayers’ deduction were not allowable, and the IRS’s finding of deficiency was entirely proper.

While the outcome incurred by the Jacksons might seem unfair, that is not the point. Knowledge is power, since understanding the limitations of what the tax code allows, including those rules that seem excessively strict, can prevent unfortunate and financially painful outcomes in the future. For information and advice about your business and business deduction issues, consult the tax attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C. They can assist you in taking steps to avoid a damaging deficiency assessment in your future. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.

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