## Facts

- Stanley and Anne Kurzet reported deductions on their 1987–1989 federal income tax returns tied to multiple high-value assets, including oceanfront property in Tahiti, a Learjet, and their California residence.
- Stanley Kurzet formed ALS Corporation in 1958; he sold his interest in 1984 for $20 million and entered into a noncompete and a seven-year consulting agreement paying $10,000 per month.
- The Kurzets acquired, among other assets, (1) Oregon timber property, (2) Tahiti oceanfront property (about 5.5 acres, acquired for about $1.1 million), (3) a Learjet (about $2 million), (4) a 24-room California residence used as their primary home, (5) a California warehouse, and (6) Park City rental condominiums.
- The Kurzets visited the Tahiti property about twice a year for several weeks and undertook extensive improvements over time; between 1984 and 1994 they spent about $1.76 million on improvements.
- The Tahiti property was briefly listed for sale in 1989; there was no evidence of rental activity, concrete development efforts, or comprehensive records supporting claimed investment intent or value appreciation.
- The Learjet was used to travel among the Kurzets’ properties and for some business-related activities connected to consulting and investments; the returns claimed deductions including depreciation and operating costs.
- After audit, the Commissioner issued notices of deficiency for 1987–1989 and asserted accuracy-related penalties.
- The Tax Court disallowed major categories of deductions (especially those tied to Tahiti and the Learjet) but declined to impose accuracy-related penalties, attributing errors to poor recordkeeping and reliance on professional preparers.
- The taxpayers appealed; the Commissioner did not cross-appeal the denial of penalties.

## Issues

1. Whether the Tahiti property was held “for profit” (investment/income production) rather than primarily for personal or recreational use, affecting deductibility of related expenses.
2. Whether the Tax Court correctly applied I.R.C. § 162(a) in disallowing Learjet-related deductions as not “ordinary and necessary” business expenses.
3. Whether the Tax Court correctly characterized and allocated expenses tied to other assets (including the California residence and warehouse) between business/income-producing and personal use.

## Decision

- The Tenth Circuit confirmed appellate jurisdiction after reviewing the timeliness of the notice of appeal.
- The court affirmed most of the deficiency determinations, including the finding that the Tahiti property was not shown to be held primarily for profit and that many related deductions were improper.
- The court reversed in part as to the Learjet, holding the Tax Court used an incorrect method under § 162(a) by treating the magnitude of depreciation as determinative of whether the expenses were “ordinary and necessary.”
- The case was remanded for reconsideration of the Learjet deductions under the correct § 162(a) analysis, including appropriate business/personal allocation.
- The Tax Court’s refusal to impose accuracy-related penalties was not reviewed because it was not appealed.

## Legal Principles

- Tax Court legal conclusions are reviewed de novo; fact findings (including intent and the business/personal character of property) are reviewed for clear error.
- A taxpayer claiming that property is held for profit must support that claim with objective evidence (e.g., concrete rental/development steps, expert/economic analysis, and reliable records); subjective hope of appreciation and extensive improvements alone do not establish a profit motive.
- I.R.C. § 162(a) permits deductions for ordinary and necessary expenses incurred in carrying on a trade or business; the inquiry focuses on business use and reasonableness in context, not merely the size of claimed depreciation.
- High-cost assets used partly for business require analysis of actual business use and allocation between business and personal use rather than categorical disallowance based solely on expense magnitude.

## Conclusion

The Tenth Circuit largely upheld the disallowance of deductions tied to assets treated as personal-use property, especially the Tahiti property, but required the Tax Court to reassess Learjet deductions because § 162(a) was misapplied when the expense analysis turned on depreciation size rather than business use and proper allocation.


Kurzet v. Comm’r, 222 F.3d 830 (10th Cir. 2000)