john and kathy brown have just been audited and the irs agent disallowed the busine 382073

John and Kathy Brown have just been audited and the IRS agent disallowed the business loss they claimed in 2010. The agent asserted that the activity was a hobby, not a business. John and Kathy live in Rochester, New York, near Lake Ontario. Kathy is a CPA, and John was formerly employed by an insurance firm. Johns firm moved in 2005 and John resolved not to move to the firms new location. Instead of seeking other employment John felt he could supplement his income by using his fishing expertise. He had been an avid fisherman for 15 years and he owned a large Chris Craft fly bridge that he chartered to paying parties. In 2006, Kathy and John developed a business plan, established a bank account for the charter activities, developed a bookkeeping system and acquired insurance to cover the boat and the passengers. John fulfilled all the requirements to receive a US Coast Guard operating license, a New York sport trolling license and a sellers permit. These licenses and permits were necessary to legally operate a charter boat. The first year of their activity was 2006. John advertised in local papers and regional sport fishing magazines. He usually had three or four half day paying parties each week. John spent at least one day maintaining and repairing his boat. Kathy usually accompanied John on charters three or four times each year. Johns charter activity was unprofitable the first two years. In 2008, John and Kathy restructured the activity to improve profitability. The restructuring included increasing advertising, participating in outdoor shows and negotiating small contracts with local businesses. After the restructuring, the activity provided a small profit in 2008 and 2009. Prepare a memo to the Browns recommending what position they should take and why. Show the logic used to arriving at your recommendation.