Project · Bad Daddy LLC v. Commissioner · U.S. Tax Court

U.S. Tax Court · Docket No. 3214-26 · Active Filing
No decision issued as of July 2026

Can you write off a yacht?
Inside a $1.56 million IRS fight.

Bad Daddy LLC claimed $3.69 million in bonus depreciation on a luxury sportfishing vessel and Pershing 70. The IRS said the activity was a hobby, not a business, and disallowed nearly all of it. Now the dispute is before the U.S. Tax Court — and it raises questions every yacht owner with a tax strategy needs to understand.

$3.69M
Bonus depreciation challenged by IRS
$1.56M
Combined imputed underpayments asserted
IRC §183
Hobby-loss rule — the central statute
2020–2021
Tax years under IRS examination

Editorial note: The factual statements attributed to Bad Daddy LLC are allegations made in its Tax Court petition and have not been adopted as findings of fact by the court. No published merits opinion or final decision was located as of July 2026. This project analysis is published for educational purposes only and does not constitute legal or tax advice.

Case File at a Glance

Category Details
CaseBad Daddy LLC v. Commissioner
CourtUnited States Tax Court — Docket No. 3214-26
Petition FiledApril 29, 2026
Tax ClassificationLLC treated as a partnership
Years Reviewed2020 and 2021
IRS DeterminationYacht activities not engaged in for profit (IRC §183)
Major Deduction Challenged$3,693,132 of 2020 bonus depreciation
2020 Imputed Underpayment$1,439,022
2021 Imputed Underpayment$126,856
Combined Amount Asserted$1,565,878 before penalties and interest
PenaltiesAccuracy-related penalties under IRC §6662
Current StatusPending — no reported decision as of July 2026

Why This Case Matters

Depreciation is not a free pass for luxury assets.

Promotional discussions of yacht ownership frequently highlight accelerated depreciation, Section 179, charter revenue, and the potential to offset other taxable income. Those benefits can be available — but only when the underlying legal and factual requirements are satisfied.

Bad Daddy LLC presents a central yacht-tax question: does the evidence show the vessel was operated as a commercial asset capable of producing an economic profit — or merely that a personal luxury asset was placed inside a business entity and offered for occasional commercial use?

The answer depends on conduct, economics, records, and contemporaneous evidence. Not simply on the existence of an LLC, a charter listing, a crew, or a tax return.

23
Fishing tournaments entered (2017–2019)
$365K
Alleged total tournament entry fees
$80K
Prize won at 2018 Abaco Blue Marlin Tournament

How the Venture Unfolded

From tournament fishing to luxury charters — and then the IRS.

2017
Bad Daddy LLC acquires a 2006 76-foot Spencer sportfishing yacht for approximately $3 million, financed in part by a $1.5 million ship-mortgage. The operation targets offshore fishing tournaments and charter revenue, with a full-time captain and permanent crew hired from the outset.
2017–2019
The partnership enters 23 major tournaments including the Bermuda Triple Crown, the Ocean City White Marlin Open, and the Abaco Beach Blue Marlin Tournament, where it wins an $80,000 purse. Total entry fees paid: approximately $365,755.
2019
The original captain departs. Management reassesses the tournament model and decides to pivot toward luxury motor yacht charters — a move that, under Treasury Regulation §1.183-2, can signal a genuine attempt to improve profitability.
Early 2020
Bad Daddy contracts to purchase a 2018 Pershing 70 in February, makes a $350,000 deposit, closes the deal in March, and takes possession shortly after — just as the COVID-19 pandemic begins shutting down the charter market.
2020–2021
The partnership claims $3.69 million in bonus depreciation on the 2020 return and reports substantial operating losses across both years. It attributes limited charter revenue to pandemic restrictions and alleged mechanical problems with the Pershing 70 that kept it out of reliable commercial service.
IRS Examination
The IRS conducts a BBA partnership audit and concludes the activities were not engaged in for profit under IRC Section 183. It disallows nearly all losses and depreciation, issuing Final Partnership Administrative Adjustments asserting $1,439,022 for 2020 and $126,856 for 2021, plus accuracy-related penalties.
April 2026
Bad Daddy LLC files a petition with the U.S. Tax Court challenging the IRS adjustments. The case remains pending with no published merits decision as of July 2026.

The Core Issues

Four questions the Tax Court will have to answer.

01
Profit motive under IRC §183
The IRS applies nine regulatory factors to decide whether an activity is genuinely for profit. The presence of a professional captain, paid crew, and tournament participation all cut in Bad Daddy's favour. The economics — spending $365K in entry fees to win $80K — and limited charter revenue cut the other way.
02
Bonus depreciation qualification
Section 168 allows additional first-year depreciation, but only on property used in a qualifying business with a genuine profit objective. If the activity fails the §183 profit-motive test, the $3.69 million bonus depreciation claim falls with it.
03
Personal use and substantiation
Sections 274 and 280F impose strict recordkeeping and substantiation requirements on mixed-use property. Deductions must be limited to the business-use percentage, and that percentage must be supported by contemporaneous logs — not reconstructed after audit.
04
Pandemic and mechanical disruption
Bad Daddy argues COVID-19 and the Pershing's mechanical problems explain the revenue shortfall. Courts have sometimes treated external disruptions sympathetically — but only where the taxpayer can demonstrate a credible pre-disruption commercial plan with supporting documentation.

The Standard the IRS Applies

An LLC and a charter listing are not enough.

Before bonus depreciation becomes relevant, a yacht owner generally must establish that the vessel was acquired for a qualifying business purpose, placed in service, and operated with a genuine profit objective. Business and personal use must be properly measured. Substantiation requirements must be met. And the deduction must be limited to the business-use portion.

Section 162 permits deductions for ordinary and necessary business expenses. Section 183 limits deductions when an activity lacks a profit motive. Section 168 governs bonus depreciation. Sections 274 and 280F add further restrictions on luxury and mixed-use property. All four interact in any serious yacht-tax position.

Lessons for Yacht Owners

What this case tells every owner with a tax strategy.

Build the commercial record before you claim the deduction
Profit motive is proven by contemporaneous evidence — charter agreements, marketing materials, booking logs, revenue records, and business plans created at the time. Reconstructed records prepared after an IRS notice carry far less weight than documentation built from day one.
Separate personal and business use rigorously
Every day of personal use must be logged and excluded from deductible business expenses. This matters most for high-value vessels where the personal-use fraction can dramatically reduce or eliminate the allowable deduction under Sections 274 and 280F.
Changing the operating model is legitimate — but document why
IRS regulations specifically recognise that switching from an unprofitable model to a new approach can support profit motive. But the change needs to be documented as a genuine business decision, not rationalised after the fact when the IRS comes calling.
Large first-year deductions draw scrutiny — prepare accordingly
Claiming $3.69 million of bonus depreciation on a luxury asset in a single year is exactly the kind of position the IRS targets in audit selection. If the underlying business position is not airtight, the deduction becomes the entry point for a much wider examination.
Partnership structure adds a layer of complexity
BBA partnership audits — the regime that applied here — operate differently from individual audits. Adjustments are made at the partnership level and can result in significant imputed underpayments affecting partners. Getting the structure and the tax position right from the outset avoids compounded exposure.

Our Specialization

Marine-sector tax problems require marine-sector expertise.

MFS works specifically with yacht owners, marine businesses, and crew — which means we understand the difference between a yacht tax strategy that holds up and one that creates the exact exposure Bad Daddy LLC is now fighting in Tax Court. Whether you are structuring a new vessel purchase, reviewing a charter operation, or preparing for an IRS inquiry, the starting point is always the same: build the commercial record first.

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Work With Us

Is your yacht tax position as solid as it needs to be?

If you own or are considering purchasing a vessel and want to understand how bonus depreciation, charter income, and profit-motive requirements interact in practice — before the IRS asks the same question — MFS can help you build a defensible position from the ground up.

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This project analysis is published for educational purposes only and does not constitute legal or tax advice. The facts attributed to Bad Daddy LLC are allegations in its Tax Court petition and have not been adopted as court findings. MFS has no affiliation with the parties to this litigation.