Review the following case study and answer the questions that follow:
John and Kathy brown have been audited and the IRS agent disallowed the business loss they claimed in 2012. The IRS agent asserted that the activity is a hobby, not a business.
John and Kathy live in New York, near Lake Ontario. Kathy is a CPA, and john formerly worked for an insurance agency. John's company closed its local operation in 2007 and John chose not to move. John decided to use his fishing expertise to run a charter fishing business as a source of income for his family.
In 2008, John, with Kathy's assistance, developed a business plan for the charter fishing business. John established a separate bank account for the charter business, set up a bookkeeping system, and purchased the necessary liability insurance. He also obtained all the required local licenses and U.S. Coast Guard license. John officially stated his business in 2008.
John advertised locally ad in sport fishing magazines. He usually had three or four half-day paying parties each week. John spent at least one day per week maintaining and repairing his boat. Kathy accompanied John on the charter trips three or four times per year.
John's business did not generate a profit in 2008 or 2009. In 2010, John made changes to his operation to make it more profitable. He increased his advertising, began attending trade shows, and negotiated contracts with local businesses. The charter business showed a small profit in 2010 and 2011.
In 2012, John began working full time for a local insurance company. John continued to run his charter business and took two or three charter parties each week. He also took one free promotional charter party each week. John's cost of operating his business increased dramatically during 2012 and the charter business generated a loss of $8,000. The entire loss was deducted on the 2012 Schedule C.
Prepare a memo to the Brown's recommending what position they should take and why. Provide substantiating documentation to support your recommendation. Include a Reference Page with the Memo and be sure your memo has proper spelling, punctuation, and grammar.