DEDICATED TO HELPING BUSINESS ACHIEVE ITS HIGHEST GOALS. NBAA MEMBER RESOURCE Morton Case Limits IRS Application of Hobby Loss Rules November 28, 2011 By Phil Crowther NBAA Disclaimer. This publication was not prepared by or under the direction of NBAA. It is being provided to NBAA Mem- bers for their general information and should not be construed as legal advice or legal opinion on any specific facts or circumstances. You are urged to consult your attorney or other advisor concerning your own situation and for any specific legal questions you may have. The recent court case of Morton v. United States' held that the aircraft operations of Peter Morton, a co-founder of Hard Rock Café, were conducted as part of a "unified business enterprise" with his other business activities and therefore were not subject to the hobby loss limitations. In this taxpayer-friendly case, the court included Morton's aircraft operations in the "unified business enterprise" for hobby loss purposes arguably without applying the list of aggregation factors in the Income Tax Regulations. This case may also be helpful to taxpayers because the other businesses in the "unified business enterprise" included a C corporation. BACKGROUND Many business owners conduct business using several different legal entities, including C corporations, S cor- porations, partnerships, and limited liability companies ILLCs). For liability and other business reasons, they will often put their aircraft in one of their business entities or in a separate leasing company that leases the aircraft to one or more business entities. Although these arrangements generally do not create any income tax benefits for the owner, the depreciation rules often cause the entity owning the aircraft to have a tax loss. In recent years, IRS auditors have tried to disallow deduction of these losses, relying on the "hobby loss" rules. Under the hobby loss rules, an individual or an S-corporation ("S-corp") cannot ded