Depends on Your Definition

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Some people define a boat as a watercraft, and others as a hole in the water into which you throw money.

In T.C. Memo. 2012-289 (Blakeney), the $4 million yacht in question qualifies for the second definition, but another defining word determines whether the taxpayer will be liable for a $632,846 deficiency.

The question is whether the yacht is “qualified Gulf Opportunity Zone property” under section 1400N(d)(2) of the Internal Revenue Code. And the answer to that depends on the definition of the word “use.”

The Gulf Opportunity Zone was created by congress as an incentive to entice businesses to re-build in the wake of Hurricane Katrina. “Qualified Gulf Opportunity Zone property” is eligible for special tax breaks, including accelerated depreciation.

Under the statute, one of the requirements to meet the definition of qualified property is that the assets have to be “used” in the area defined as the Gulf Opportunity Zone.

The taxpayers say that for property to be “used” by a taxpayer, it must first be in a condition to serve its intended purpose. Because the yacht was under almost constant repair and couldn’t travel more than a few miles offshore, it was not “used” until it arrived in the Gulf Opportunity Zone and could be “used” as intended, as a charter boat traveling 20-40 miles offshore.

The IRS says the yacht was “used” every day after it was purchased, and therefore all the use occurred outside the Gulf Opportunity Zone.

Since words in a statute must be interpreted according to their everyday, ordinary meaning, the tax court got out the dictionary [Merriam Webster’s Collegiate Dictionary 1301 (10th ed. 1996)], and determined that “use”, when used as a verb, as it is in section 1400N(d)(2)(A)(ii), means, “to put into action or service; avail oneself of.”

The result: After the purchase, the yacht was used part of the time in the Gulf Opportunity Zone, and partly outside the Zone. Unfortunately for the taxpayer, the time spent in the Zone was not enough to qualify for the bonus depreciation tax break.

Taxing Lesson: Whether you use it, abuse it, or misuse it, language is important.

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