[PUBLISH] In the United States Court of Appeals For the Eleventh Circuit

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No. 22-10707 ____________________

CARL L. GREGORY, LEILA GREGORY, Petitioners-Appellants, versus COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.

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Petition for Review of a Decision of the U.S. Tax Court Agency No. 10336-18 ____________________ USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 2 of 23

2 Opinion of the Court 22-10707

Before WILSON, JORDAN, and BRASHER, Circuit Judges. BRASHER, Circuit Judge: This appeal is a tax dispute over a yacht. It raises an issue of first impression about whether hobby losses under Section 183(b)(2) of the Internal Revenue Code should be treated as mis- cellaneous itemized deductions. This treatment matters for many reasons, including because taxpayers (during the relevant time) could deduct miscellaneous itemized deductions only for amounts that exceeded two percent of their adjusted gross income. Carl and Leila Gregory chartered their yacht, Lady Leila, in 2014 and 2015. They did not conduct the chartering activity for profit—it was a hobby. Though the hobby generated income, it also incurred sizeable expenses each year. The Gregorys deducted some of those expenses under Section 183(b)(2) and placed them “above the line” to reduce their gross income. After an audit, the Commissioner determined that the Section 183(b)(2) deductions were miscellaneous itemized deductions under Section 67, mean- ing that they belonged “below the line” and reduced adjusted gross income, not gross income. Moreover, because the Gregorys had earned tens of millions of dollars in 2014 and 2015 and, at that time, the Code allowed miscellaneous itemized deductions only to the extent that they exceeded two percent of adjusted gross income, the Commissioner disallowed the Section 183(b)(2) deductions al- together. Facing deficiencies and penalties, the Gregorys petitioned USCA11 Case: 22-10707 Document: 37-1 Date Filed: 05/30/2023 Page: 3 of 23

22-10707 Opinion of the Court 3

the Tax Court, which granted summary judgment for the Commis- sioner. They now seek appellate review. Everyone agrees that Section 183(b)(2) allows a deduction for a certain amount of hobby losses, which is capped at the hobby’s gross income. But we must decide where those deductions belong on a taxpayer’s return: above the line (reducing gross in- come) or below the line as miscellaneous itemized deductions (re- ducing adjusted gross income). We believe the provisions of the Internal Revenue Code, taken together, answer this question and hold that Section 183(b)(2) expenses are below-the-line miscellane- ous itemized deductions. We agree with the Tax Court and deny the petition for review. I.

We begin by reciting the relevant facts, which are not dis- puted. In 2011, the Gregorys formed CLC Ventures, Ltd., a Cay- man Islands corporation, to own and charter a yacht named Lady Leila. Because CLC elected for treatment as a