Taking business deduction for RV ends up costing taxpayers

By James A. Beavers, CPA, CGMA, J.D., LL.M.

Business deductions for the use an RV taken on the returns of a corporate entity owned by the taxpayers were found to be evidence that the taxpayers had used the RV for commercial purposes, voiding a warranty on the RV.

Background

Michele and Dan Harkins bought a Weekend Warrior toy hauler RV from The RV Factory in June 2016. They sold their home and planned to live in the RV full time with their children and travel the country. The Harkinses signed a one-year limited warranty when they purchased the vehicle. The warranty said, "Use of recreational vehicle for any commercial or rental purpose voids the warranty from the time that the vehicle is first used for a commercial or rental purpose and at all times thereafter."

The Harkinses signed the RV's warranty in their names, but they bought the vehicle in the name of Getaway Crew LLC, a company that was formed for Michele Harkins's travel agency business in which they were the only two members. Michele testified that they purchased the RV in the LLC's name for legal protection and tax purposes. The Harkinses listed the RV as a piece of property "used 50% or less in a qualified business use" on the Getaway Crew's tax returns in 2016, 2017, and 2018. Mrs. Harkins also testified during her deposition that she operated her travel business from the RV while the Harkinses were living in it.

The RV eventually needed repairs, which the Harkinses believed should be covered by the warranty. The RV Factory disagreed, claiming that the warranty was voided because Michele Harkins, by working in the RV, used it for commercial purposes. At this, the Harkinses sued The RV Factory for breach of warranty and violation of the Magnuson-Moss Warranty Act in district court.

The RV Factory moved for summary judgment. A court will grant summary judgment if the record shows there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.

The district court's decision

The court found that the material facts were undisputed and granted The RV Factory's motion for summary judgment.

The court observed that a corporate entity, Getaway Crew LLC, purchased the RV; Michele Harkins testified that she and her husband purchased the vehicle in the LLC's name for tax benefits; on the Getaway Crew's tax returns, the RV was listed as a business expense; and Michele Harkins said that she worked remotely out of the RV while her family was living in it. Thus, there was no genuine issue as to whether the plaintiffs used the RV for a commercial purpose. Because the Harkinses signed a limited warranty with The RV Factory that said the warranty would be void if the RV was used for a commercial or rental purpose, the warranty was void.

The Harkinses argued a genuine dispute of material fact existed because they paid for the RV with their own money. The court, however, found this to be immaterial. Where the money used to pay for the RV came from did not create a dispute as to whether a corporate entity signed the purchase agreement for the vehicle and included it as a business expense on its tax returns.

The Harkinses further argued that The RV Factory waived its right to void the warranty for commercial use because its representatives were aware that Michele Harkins intended to use the RV for commercial use. The court disagreed and concluded, citing Knopick v. Jayco, Inc., 895 F.3d 525, 530 (7th Cir. 2018), that the right to void a warranty by conduct is "not readily subject to waiver" and the Harkinses had not produced evidence that The RV Factory had waived it.

Reflections

As this case demonstrates, actions taken to maximize tax deductions can have deleterious nontax effects. Here, in an effort to turn personal property into depreciable business property, the taxpayers unwittingly voided a valuable warranty on the property.

Harkins v. The RV Factory, LLC, No. 3:17-cv-00853 (N.D. Ind. 6/25/20)

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