t c memo united_states tax_court lucian t baldwin iii petitioner v commissioner of internal revenue respondent lucian t baldwin iii and teresa m baldwin petitioners v commissioner of internal revenue respondent docket nos filed date arnold a pagniucci paul d carman steven a miller austin l hirsch and henry pietrkowski for petitioner lucian t baldwin iii john j morrison for petitioner teresa m baldwin marjory a gilbert catherine thayer and claire mckenzie for respondent memorandum findings_of_fact and opinion marvel judge in these consolidated cases respondent determined the following deficiencies additions to tax and penalties in petitioners’ federal income taxes docket no lucian t baldwin iii and teresa m baldwin accuracy-- additions to tax related penalty year deficiency sec_6653 sec_6661 sec_6662 a dollar_figure dollar_figure dollar_figure ---- big_number - ---- dollar_figure docket no lucian t baldwin iit accuracy-- related penalty year deficiency sec_6662 a dollar_figure dollar_figure big_number big_number big_number big_number all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure monetary amounts are rounded to the nearest dollar after concessions ’ the issues for decision are ‘respondent has conceded that petitioner teresa m baldwin mrs baldwin qualifies for relief from joint liability under sec_6015 other assignments of error raised in the petitions and not addressed in the stipulations of settled issues or on brief are deemed conceded see rule e and 92_tc_661 money v commissioner continued - - whether loma farms inc lfi an s_corporation owned by petitioner lucian t baldwin iii petitioner that purportedly owned and managed a big_number acre lakefront lodge property known as granot loma operated a trade_or_business within the meaning of sec_162 or conducted an activity_not_engaged_in_for_profit within the meaning of sec_183 whether the duty_of_consistency or the doctrine_of equitable_estoppel applies to bar petitioner’s contention that baldwin aircraft corp bac was not a valid s_corporation during the years at issue if the duty_of_consistency or the doctrine_of equitable_estoppel applies to bar petitioner’s contention whether bac operated a trade_or_business within the meaning of sec_162 or whether bac conducted an activity_not_engaged_in_for_profit within the meaning of sec_183 whether deductions for lodging and travel_expenses claimed by baldwin commodities corp bcc for and are allowable under sec_162 and sec_274 and whether petitioner is liable for the additions to tax and penalties determined by respondent t continued 89_tc_46 - findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and supplemental stipulations of facts are incorporated in this opinion by this reference background at the time the petitions in these cases were filed petitioners who were married to each other during the years at issue were no longer married and resided separately in winnetka tllinois petitioner received his bachelor of science degree from santa clara university he subsequently obtained a master of business administration degree with emphasis in agribusiness petitioner also attended law school for two semesters on a part- time basis petitioners were married in they have three children christina jane and lucian born in and respectively in september of petitioners separated and in late a petition for divorce was filed in following a hotly contested trial involving multiple issues concerning the ownership of property a judgment of dissolution was entered and petitioners’ divorce became final petitioner’s bond trading activities and other business ventures petitioner has been a bond trader at the chicago board_of trade since from through petitioner traded as a - - sole_proprietor under the name of baldwin commodities bc in petitioner incorporated the proprietorship and became sole shareholder of bcc an s_corporation during the years at issue petitioner was a very successful trader in the bond pit at the chicago board_of trade petitioner’s success was due at least in part to his financial resources reputation and relationships with brokers and other traders in the bond pit his financial resources enabled him to trade with brokers representing institutional clients and other traders with large volume orders in petitioner earned dollar_figure from his bond trading activity during the years at issue the amount of time petitioner spent in the bond pit decreased as a result of his marital problems and the divorce litigation as well as health problems that followed a plane crash in date petitioner’s income from bond trading during the years at issue was as follows year income dollar_figure big_number big_number big_number big_number during the years at issue petitioner began to diversify his business and investment interests and formed several new companies for example in date petitioner purchased -- - the rookery building on lasalle street in chicago and formed two real_estate companies baldwin development corp bdc and baldwin asset management co bamco to restore and manage the rookery building in date petitioner incorporated baldwin financial corp bfc bfc was registered with the commodity futures trading commission as a commodity pool operator anda commodity trading adviser in petitioner formed a new york general_partnership named mc baldwin financial to continue bfc’s business as a commodity pool operator and commodity trading adviser granot loma during and petitioners looked sporadically for a vacation home petitioner first learned of the existence of granot loma in during a family vacation in petitioners accompanied by their children and mrs baldwin’s brother pat matre and his family drove to see the property granot loma consisted of approximately big_number acres including miles of lake superior shoreline there were two complexes of buildings at granot loma the large log cabin lodge with its associated outbuildings and the old farm complex a separate small log cabin which was the original depot for the railroad spur that once serviced the property was also located on the property - the lodge complex was located on lake superior and consisted of the large log cabin lodge a garage a child’s playhouse a separate building called the maid’s quarters a carriage house and a guest house the lodge at granot loma had bedrooms arranged in suites because the lodge was sited on a small peninsula many of the lodge’s rooms faced lake superior ’ the old farm complex was located down the road from the lodge complex and consisted of a farmhouse a caretaker’s house a barn a piggery a manure house a slaughterhouse a creamery which had been converted to a pool house prior to anda pheasant pigeon house the farmhouse and the caretaker’s house were both habitable residences in the garage pool house and depot were the only other buildings in usable condition in the remaining buildings were all in need of substantial repairs renovation and cleaning the area around granot loma was essentially a wilderness area the property was forested and contains mature stands of hemlock maple pine birch cedar spruce and poplar included in its acreage was over a mile of frontage on the little garlic the lodge was built in the 1920s by financier lewis kaufman in the style of an adirondack camp visitors during the 1920s and 1930s included governor al smith actress mary pickford and the pianist and composer george gershwin the deal to build the empire state building was finalized at granot loma by however when petitioner purchased granot loma the grand days of granot loma were long over no one had lived in the lodge for decades --- - river considered to have some of the finest rainbow trout fishing in the state of michigan since at least date granot loma’s frontage area has been zoned for recreational structures the farm area has been zoned for rural residential another area has been zoned for resource production and the remaining acreage has been zoned for timber production petitioners’ acquisition of granot loma when petitioners’ family and the matre family first visited granot loma in the two families toured the property with caretaker george johnson during the tour petitioner mrs matre and mr johnson discussed numerous issues including the history and use of granot loma other potential buyers of the property and potential business uses of the property such as for a corporate retreat mr johnson also suggested selective logging of the valuable maple trees that grew on the property as well as other ventures such as a hunting club that could take advantage of the property’s natural_resources when petitioner first viewed the lodge he thought the property could be restored to its former grandeur within a few days of their first visit petitioners decided to purchase granot loma and the transaction closed on date petitioners ‘the record does not reflect the types of activities that would have been allowed by local zoning laws as of the time of purchase or how they changed if at all through date --- - paid dollar_figure for granot loma and took title to the property as tenants by the entireties ’ around the time of granot loma’s purchase petitioner discussed with eugene portman an attorney who specialized in real_estate law the creation of several corporate entities to house several new businesses and investments petitioner was acquiring in an attempt to diversify his assets mr portman handled granot loma’s closing and associated preclosing matters for petitioner on date mr portman filed articles of incorporation with the illinois secretary of state for a company that was later renamed loma farms inc lfi the articles stated that the company was formed for the purpose of engaging in the business of property manager and convention hotel and resort manager petitioner was lfi’s sole shareholder petitioner’s restoration of granot loma petitioner engaged mr matre as his general contractor for the restoration of granot loma in exchange for mr matre’s services petitioner promised him percent of any profit upon the sale of granot loma and free use of the property when space was available this amount includes dollar_figure paid to george and carmen johnson to purchase the depot property -- - because petitioner thought he might use granot loma as a lodge or corporate retreat at some point his plan for the restoration included commercial amenities for example petitioner renovated and equipped the kitchen so that up to guests could be accommodated petitioner installed a commercial bar system which dispensed metered shots of liquor and soda through hoses from a basement storage area furthermore heating electrical and other major systems were all built to withstand and support commercial use in many other respects however granot loma’s restoration also reflected petitioners’ intent to use it as a personal_residence for their immediate and extended family their friends and other invited guests for example although the renovation of the kitchen included the installation of commercial grade equipment and systems the kitchen was designed so that it easily could be used by petitioners and their family and friends when they visited granot loma petitioners’ renovation of the kitchen included a greenhouse addition which was used as a family dining area when mrs baldwin decorated the lodge with help from an interior decorator she decorated the lodge to be her family home thus the second floor of the lodge housed a nursery a children’s play area a media room a home_office and a master bedroom for petitioners along with several other bedrooms used for petitioner’s children mr matre and his family and other regular guests renovation of the lodge began in the spring of and was substantially completed by the end of that year the lodge however was not habitable until date when furniture was first moved into the lodge during the renovation period petitioner and his family visited on a weekly or biweekly basis so that petitioner could supervise the contractors and his family could enjoy the property until the lodge was habitable petitioner’s family and mr matre’s family stayed in the farmhouse the cost of capital improvements to granot loma from date through date totaled dollar_figure petitioners’ use of granot loma before acquiring granot loma petitioners took vacations to various locations around the world including long trips on holidays from the date they acquired granot loma through date petitioners spent almost every holiday at granot loma during the years at issue petitioners and their family personally used granot loma as follows year days used granot loma’s most frequent visitors were petitioners their children and other family members other visitors during the years at issue included personal friends business associates and pilots on several occasions petitioners’ extended families joined them at granot loma while at granot loma petitioners and their guests participated in recreational activities such as riding all- terrain vehicles atvs snowmobiling skiing hunting boating and fishing petitioners kept two small atvs at granot loma for their children to ride and three to four full-size atvs petitioners also kept snowmobiles at granot loma when petitioners first purchased granot loma their children were young the children played swam rode on atvs and snowmobiles and otherwise participated in normal childhood activities petitioner participated in many activities with his children and even on days when petitioner was out hunting or fishing the family ate meals together and played together in the evenings petitioners’ children left toys bicycles and clothing at granot loma when they returned to winnetka petitioners used the master suite at granot loma as their bedroom and office until they separated mrs baldwin left her personal belongings in the master bedroom when she returned to winnetka after his separation from mrs baldwin in petitioner spent many weekends and holidays with his children at granot loma throughout the years at issue petitioner insured granot loma as his second residence petitioner also insured all the recreational vehicles at granot loma ie boats personal watercraft and snowmobiles as his personal_property petitioner occasionally discussed investments or other business matters while at granot loma petitioner also entertained family members and friends with whom he did business as well as employees traders brokers and other business associates at such events as annual employee weekends and trader weekends from time to time petitioner investigated possible business uses for granot loma for example in petitioner decided to plant christmas trees on the property also in following a vicious winter storm petitioner engaged a logging company to remove some storm-damaged trees sometime later petitioner hired a contractor to conduct a selective timber harvesting program on a limited trial basis in approximately the marquette county soil and water conservation district was consulted to determine the optimum locations for planting the trees petitioner rejected the conservation district’s first choice for siting the trees as he wanted to keep that field available for a runway petitioner ultimately decided to plant the christmas trees along the driveway a site not recommended by the conservation district in the year following their planting approximately one-half of the newly planted trees died because their roots had not been clipped prior to planting the burden of digging up the dead trees and replanting was deemed to exceed any expected benefit so the christmas_tree operation was abandoned none of the christmas trees planted at granot loma ever generated any income granot loma’s caretaker and his wife experimented with some maple syrup equipment they found on the property to tap some of the maple trees growing on the property and process the sap into syrup they ceased the experiment however after the caretaker’s wife received burns as a result of their activity in date petitioner hired joseph ketter as caretaker and property manager for granot loma when mr ketter was hired he was informed that petitioner intended to use granot loma as a business retreat at some point after he was hired mr ketter was instructed to issue an invoice in lfi’s name to one of petitioner’s other corporations each time petitioners a member of their family or one of their friends business associates or guests visited granot loma for example the first invoice for dollar_figure dated date was addressed to bac and covered three nights for two pilots at a rate of dollar_figure per person per night another invoice dated date for dollar_figure was addressed to bcc reflecting the overnight stays of petitioner’s employees during the employee weekend at the same rate one invoice for dollar_figure dated date was addressed to bcc and retroactively billed bcc for visits by petitioner his family and their guests during and ‘petitioner’s accountant mr dimaggio was first contacted by a representative of the internal_revenue_service regarding the examination at issue in this case in date -- - the early part of from date through the end of lfi billed bcc for every night petitioner a member of his family one of his business acquaintances or one of his friends stayed at granot loma lfi did not bill any of the guests directly all invoices were sent either to bcc bdc or bac in fact almost none of the guests were even aware that lfi was charging anyone for their stay even mrs baldwin was not aware of lfi’s invoicing system until the divorce proceedings commenced no rooms at granot loma were ever held out to the public for rent and no rooms were ever rented to the public ’ no leases or rental contracts for the rental of granot loma were executed by lfi any guest or any of petitioner’s other companies only petitioner’s relatives friends business acquaintances and other invited guests used granot loma in fact petitioners decided not to operate granot loma as a commercial lodge because they did not want to curtail their use of the facility or to open it up for use by guests they had not invited personally when mr ketter set the rental rates for granot loma he did not estimate an occupancy rate project the frequency of use or ‘in date worth brown a resort manager visited granot loma for the purpose of determining whether granot loma could be operated as a luxury resort he concluded that it was possible petitioners however decided not to commence a bed and breakfast or other business open to the public because they did not want to share the lodge with outsiders granot loma was never operated as a commercial lodge -- - conduct any market studies the initial per-night rate of dollar_figure per person purportedly covered lodging and meals and did not vary by room mr ketter increased the per-night rate to dollar_figure per person in date to dollar_figure per person on date and to dollar_figure per person on date visitors to granot loma enjoyed for no additional_charge the disney channel and other entertainment channels babysitters shotgun shells archery targets and arrows dry cleaning and a variety of other items of a personal nature all of lfi’s purported rental income came from bcc and other companies owned or controlled by petitioner the income however was insufficient to cover lfi’s alleged expenses lfi’s cashflow deficits were funded through a shareholder’s loan account thus ensuring that granot loma had adequate cashflow to cover expenses bcc paid some of lfi’s invoices by intercompany account transfers others were paid_by reducing lfi’s indebtedness to bcc in the summer of petitioners held an auction to sell off furniture and rugs at the lodge that had not been used in the restoration the auction raised a total of dollar_figure the net_proceeds were applied to reduce lfi’s debt to bcc in a stipulation of settled issues the parties agreed that petitioner had additional capital_gains of dollar_figure arising from the auction sale and that the auction sale proceeds were not ordinary_income to lfi - - petitioner’s attempt to sell granot loma in petitioner decided to sell granot loma his decision to do so was influenced by his marital problems anda day trading loss of approximately dollar_figure million in early gary walker an appraiser valued the property in excess of dollar_figure million on date after discussions and negotiations with several real_estate brokers petitioner listed granot loma with a broker for an asking price of dollar_figure million although the property generated considerable interest no reasonable offers were received petitioner renewed the listing once and then allowed it to expire during on his financial statement dated date petitioner reported the value of his interest in lfi as dollar_figure during the pendency of his divorce petitioner obtained an appraisal of granot loma that valued the fee simple interest in the property as of date at dollar_figure that appraisal identified petitioners as the owners of granot loma bac on date petitioner purchased a beechcraft king air king air and formed bac to own and operate the king air articles of incorporation for bac were prepared and filed in north carolina the same day on date bac traded its king air for a sabreliner jet the sabre petitioner hired professional pilots to fly the sabre bac’s s election mr portman recommended that bac be owned by mrs baldwin in order to protect petitioner’s trading business from liability in the event of an accident and informed petitioner’s accountant that mrs baldwin would own bac mr portman prepared bac’s form_2553 election by a small_business_corporation under sec_1362 of the internal_revenue_code and sent the form_2553 to petitioner with instructions for mrs baldwin to sign as sole shareholder however mrs baldwin did not sign the form and did not consent to bac’s election to be treated as an s_corporation instead liz matre signed mrs baldwin’s name as consenting shareholder and as president of bac on the form respondent accepted the facially complete form_2553 on date bac’s and forms 1120s u s income_tax return for an s_corporation list mrs baldwin as bac’s sole shareholder bac’s and forms 1120s which were filed after petitioners’ divorce proceeding had commenced list petitioner as bac’s sole shareholder bac’s transportation activity during the years at issue petitioner regularly used the sabre to transport himself and his family friends and other invited guests to granot loma in an effort to structure the operation of bac as a business petitioner beginning in approximately date arranged for bac to invoice one of his other companies each time the sabre was used from through and including bac billed one of petitioner’s companies for each person transported ussing a per capita rate established by bac’s president after consultation with petitioner ’ the per capita rate used to prepare the invoices was increased in and in an effort to reduce bac’s substantial operating losses bac claimed depreciation on the sabre which was titled in bac’s name and on a cessna which was not titled in bac’s name petitioner acquired the cessna ostensibly so that he could obtain his pilot’s license and eventually fly the sabre during the years at issue bac did not offer the sabre for charter by third parties nor did it lease the sabre to a third party bac used the sabre to provide transportation exclusively to petitioners their family and invited guests after date bac did not include passenger names other than petitioner’s in the aircraft utilization reports and trip recaps maintained by bac in addition bac did not maintain any records regarding the nature of the trips taken on its aircraft record title to the cessna was apparently held by a separate corporation lucian aircraft co which insured the cessna until petitioner’s accountant testified that bac claimed depreciation on the cessna because bac should have owned the cessna certain records in evidence show that the cessna was rented on three occasions during by people who were or had been employed as bac’s pilots tax reporting lei on a schedule f farm income and expenses a ttached to petitioners’ federal_income_tax return form_1040 petitioners represented that granot loma was a christmas_tree farm and claimed a depreciation deduction of dollar_figure with respect to personal_property with a book_value of dollar_figure million and improvements with a book_value of dollar_figure on lfi’s forms 1120s for through following income income lodging tree removal auction less refunds other income total income expenses salaries wages repairs bad_debts rents taxes depreciation employee_benefits other expenses total expenses net_income or loss bac expenses -q- -q- dollar_figure big_number big_number big_number big_number lfi reported the and net operating losses dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number on bac’s forms 1120s for through following income expenses dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number bac reported the and net operating losses income rental income dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure other income big_number total income big_number big_number big_number big_number expenses salaries wages big_number big_number big_number big_number repair sec_87 sec_433 rents hangar big_number big_number big_number big_number big_number taxes big_number big_number big_number depreciation big_number big_number big_number big_number big_number employee_benefits big_number other expenses big_number big_number big_number total expenses big_number big_number big_number big_number net_income or loss big_number big_number big_number big_number accountant’s role throughout the years at issue petitioner utilized the services of victor dimaggio a certified_public_accountant mr dimaggio provided consulting services to petitioner with respect to lfi and bac prepared lfi’s bac’s bcc’s and petitioners’ tax returns and helped lfi’s and bac’s employees set up and maintain the books_and_records for those companies mr dimaggio also advised petitioner individually regarding some tax matters petitioner instructed his employees to contact mr dimaggio directly whenever they had any tax-related questions at some point before he prepared petitioner’s return mr dimaggio warned petitioner that lfi and bac may be activities not engaged in for profit and that therefore the losses attributable to those activities may be disallowed under sec_183 in addition in the course of preparing bcc’s tax returns for the years at issue mr dimaggio estimated that a substantial portion of the amounts billed to bcc by lfi and bac for and were attributable to petitioner’s personal_use of - granot loma and the aircraft specifically mr dimaggio estimated that percent of the amounts billed in and percent in and by lfi and bac were attributable to petitioner’s personal_use of granot loma and the aircraft the audit and notices of deficiency in date mr dimaggio was first contacted about the audit of petitioners’ returns in date jean witek the revenue_agent assigned to audit petitioners’ returns sent the initial audit letter to petitioners in during the pendency of petitioners’ divorce case counsel for mr and mrs baldwin argued in court about which party owned bac the ownership dispute mr dimaggio claimed that ms witek observed these arguments and subsequently referred to the ownership dispute in conversations with him the audit eventually was completed without any change to bac’s s_corporation status during the appeals process mr dimaggio never mentioned the ownership dispute nor did he raise any issues concerning the validity of bac’s s election with any of respondent’s appeals officers or other agents the protest documents filed by mr dimaggio represented indirectly that bac was a valid s_corporation ie he maintained that petitioners were entitled to deduct bac’s passthrough losses according to mr dimaggio he and ms witek agreed to defer consideration of the ownership dispute until the end of the audit unfortunately ms witek was unable to complete the audit because of illness - - respondent proposed numerous adjustments in the notices of deficiency most of which have been resolved for each year at issue with respect to bac respondent disallowed all of bac’s expenses and recalculated bac’s income accordingly determined that petitioner must include in his income bac’s corrected s_corporation income and allowed petitioner additional schedule a miscellaneous deductions in amounts equal to bac’s corrected s_corporation income presumably pursuant to sec_183 ’ for and with respect to lfi respondent disallowed petitioner’s deductions of lfi’s distributive net losses for respondent disallowed all of lfi’s deductions and determined that petitioner must include in income lfi’s corrected s_corporation income but did not make any adjustment under sec_183 except with respect to granot loma’s real_estate_taxes for respondent reclassified lfi’s net auction proceeds as capital_gain to petitioner disallowed all of lfi’s deductions and determined that petitioner must include in income lfi’s corrected s_corporation income but did not make any adjustment under sec_183 except with respect to granot loma’s real_estate_taxes by disallowing petitioner’s deductions of bac’s losses respondent effectively allowed petitioner the adjustment required by sec_183 -- - opinion i lfi issues in a far-ranging and sometimes unfocused attack on lfi respondent in his notices of deficiency asserted numerous grounds for disallowing lfi’s deductions and recalculating lfi’s distributive net_income for the years at issue petitioner has not established the amounts in question were paid_or_incurred in a trade_or_business granot loma was never transferred to lfi by petitioners and therefore lfi is not entitled to depreciate granot loma petitioner has not established that he was at risk with respect to lfi petitioner has not established that the activity was entered into for profit petitioner has not established that the transaction had economic_substance petitioner has not established that the claimed losses were incurred or were otherwise allowable and petitioner has not established that the amounts claimed as payments were paid and if paid were for the purpose as stated although the parties devoted most of their arguments on brief to the issue of whether lfi was a trade_or_business under sec_162 or an activity_not_engaged_in_for_profit within the meaning of sec_183 the parties also addressed the other grounds raised in the notices of deficiency as well as an additional argument under sec_280a that was not enumerated in or expressly raised by the notices of deficiency because we believe that the issue regarding the proper tax treatment of - - lfi’s income deductions and losses may be appropriately resolved by applying sec_162 and sec_183 we direct our analysis accordingly a sec_162 and sec_183 under sec_162 a taxpayer may deduct the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on his trade_or_business a taxpayer is engaged in a trade_or_business if the taxpayer is involved in the activity with continuity and regularity and with the primary purpose of making a profit 480_us_23 893_f2d_656 4th cir affg 91_tc_656 petitioner has the burden of proving that lfi was engaged in a trade_or_business and that lfi is entitled to the deductions claimed rule a 503_us_79 292_us_435 290_us_111 if petitioner fails to establish lfi’s entitlement to the deductions under 3the internal_revenue_service restructuring reform act of publaw_105_206 sec 112_stat_726 added sec_7491 which is applicable to court proceedings arising in connection with examinations commencing after date under sec_7491 congress requires the burden_of_proof to be placed on the commissioner subject_to certain limitations where a taxpayer introduces credible_evidence with respect to factual issues relevant to ascertaining the taxpayer’s liability for tax in the instant case petitioners have not raised the application of this provision further the record indicates that the commissioner’s examinations commenced before date - - sec_162 and fails to show error in respondent’s determination that lfi was engaged in an activity not for profit then sec_183 limits lfi’s deductions for expenses attributable to the activity as provided in sec_183 in order to establish that lfi engaged in an activity for profit petitioner must show he entertained an actual and honest profit objective’ in engaging in the activity even if that objective was unreasonable or unrealistic 809_f2d_355 7th cir affg tcmemo_1985_523 81_tc_210 78_tc_642 affd without opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs although sec_183 applies at the corporate level with respect to the activities of an s_corporation sec_1_183-1 income_tax regs we consider the intent of petitioner lfi’s sole shareholder in deciding whether lfi had the requisite profit objective see eppler v commissioner sec_183 provides that a taxpayer is engaged in an activity not for profit if the activity is one other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 petitioner argues for the first time on brief that lfi is entitled to deduct its expenses under sec_212 if we conclude that lfi did not operate a trade_or_business for profit under sec_162 respondent objects to this argument as untimely raised and prejudicial we agree with respondent and decline to consider petitioner’s argument under sec_212 75_tc_374 ‘petitioner bears the burden of proving that he had the requisite profit objective rule a -- p7 - t c affd without published opinion 486_f2d_1406 7th cir 36_tc_1097 in determining whether the requisite intention to make a profit exists greater weight is to be given to the objective facts than to the taxpayer’s self-serving characterization of his intent dreicer v commissioner supra pincite sec_1_183-2 income_tax regs sec_1_183-2 income_tax regs sets forth a nonexclusive list of factors to be considered in determining whether the taxpayer has the requisite profit objective the factors are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or loss with respect to the activity the amount of occasional profits if any that are earned the financial status of the taxpayer and elements of personal pleasure or recreation no single factor is determinative and not all factors are applicable in every case burger v commissioner supra pincite n 72_tc_28 sec_1 b income_tax regs - - respondent contends that petitioner used granot loma as a residence and that lfi did not own granot loma and did not operate a trade_or_business or otherwise engage in any activity for profit during the relevant years as we understand it petitioner’s argument is that from the date petitioners purchased granot loma granot loma was a business asset that petitioner and then lfi used in one or more business activities for profit the activities that petitioner alleges he or lfi conducted for profit at granot loma include a christmas_tree farm a timbering operation a maple syrup operation anda rental_activity petitioner also alleges that petitioners and or lfi acquired granot loma with the intent of renovating and operating it as a commercial property or selling it for a profit for the reasons set forth below we agree with respondent from the time petitioner and his wife purchased granot loma in petitioner was determined to claim that granot loma was a business and began to deduct granot loma’s expenses initially for on a schedule f and then through lfi an s_corporation for petitioner through lfi claimed deductions for depreciation of granot loma buildings and improvements including the lodge which was uninhabitable and in the process of being renovated other alleged operating_expenses and some of the expenses_incurred in renovating the lodge claiming that granot loma was an operating christmas_tree farm for through - - petitioner through lfi claimed that granot loma was used exclusively for business and continued to depreciate granot loma buildings and improvements to deduct all of granot loma’s alleged operating_expenses and to report as lodging income amounts paid or credited to lfi by petitioner’s other companies on his federal_income_tax returns for through petitioner deducted passthrough losses from lfi in the aggregate amount of dollar_figure in support of lfi’s aggressive writeoff of granot loma petitioner asserts that lfi maintained extensive books_and_records experimented with and abandoned unprofitable activities and consulted with various experts regarding the renovation of granot loma as a commercial facility petitioner also contends that he devoted considerable time and effort to the renovation and operation of granot loma that he regularly used granot loma for business meetings throughout the years at issue and that he intended among other things to sell granot loma at a profit we first examine the activities in which lfi allegedly engaged in order to ascertain whether any of those activities were conducted with sufficient continuity and regularity to satisfy the threshold test for a trade_or_business petitioner contends that granot loma was the site of an operating christmas_tree farm a timbering operation a maple syrup operation anda rental_activity in connection with the lodge lfi also sold at -- - auction during various personal_property that was not used in the lodge renovation and claimed the auction proceeds as business income although there were isolated episodes in which lfi began to explore possible money-making ventures these activities never materialized into a real business venture either individually or collectively for example the christmas_tree operation which began with the planting of trees in was abandoned within a year after the initial planting because over half of the trees planted had died similarly the experiment with maple sugaring was abandoned after lfi’s caretaker’s wife suffered burns during the processing of the sap the timbering operation likewise never got past the exploratory stage the auction was a one-time sale of excess furnishings that were not used in the renovation of the lodge and under the circumstances was the functional equivalent of a garage sale only on a larger scale carrying_on_a_trade_or_business requires a showing of more than initial research into or investigation of business potential 20_tc_511 none of the above-listed activities either individually or collectively were conducted with continuity or regularity and hence do not constitute a trade_or_business for purposes of sec_162 see commissioner v groetzinger u s pincite - - the only activity allegedly conducted by lfi that warrants detailed examination under sec_162 and sec_183 is the alleged rental of the lodge beginning in and continuing throughout the remaining years at issue lfi billed one of petitioner’s other companies for every night spent at granot loma by petitioners and their family friends and business lfi arguably conducted this activity variously acquaintances ’ characterized by petitioner as a rental business or as the operation of a corporate retreat or lodge with sufficient continuity and regularity from through at least that an examination of whether the activity was conducted with the intent to make a profit is appropriate in making the examination we apply the factors of sec_1_183-2 income_tax regs the factors on which petitioner primarily relies in support of his argument that petitioner’s and lfi’s use of granot loma was an activity for profit are the manner in which petitioner and lfi operated granot loma the expertise of petitioner and his advisers the amount of time and effort petitioner devoted to granot loma and petitioner’s expectation that granot loma would appreciate in value and ultimately be sold at an economic profit the factors on which respondent primarily relies in support '6tn after petitioner’s accountant raised concerns about lfi’s ability to withstand scrutiny under sec_183 petitioner arranged for granot loma’s caretaker to bill for each time petitioner his family and his guests stayed overnight at granot loma during and the early part of - - of his argument that petitioner’s and lfi’s use of granot loma was not an activity for profit are the substantial history of losses generated by the alleged business activity the complete lack of any profits from the activity over a 6-year period petitioner’s financial status during the years at issue and the personal pleasure and recreation derived by petitioners from their use of granot loma the record in this case reveals that petitioners purchased granot loma and renovated the lodge and other parts of the property in part for possible commercial use in the future in so doing petitioner consulted with advisers regarding equipment and systems to be installed in the lodge and around the property to support commercial use the record also reveals however that the renovation was designed to enable petitioner and his family to use granot loma as their residence whatever petitioner’s intention might have been regarding the operation of granot loma as a commercial property at some point in the future the evidence convinces us that granot loma was purchased primarily for use as petitioners’ residence and it was used primarily as a residence e as petitioners’ vacation home like any other residence granot loma was used by petitioners for their own enjoyment and to entertain family friends and business acquaintances occasional entertainment of petitioner’s business acquaintances however does not support a - - conclusion that granot loma was used in an activity engaged in for profit while it is certainly true that lfi maintained books_and_records of its activities the record is devoid of any credible_evidence that the books_and_records were used to make informed business decisions regarding the operation of a business at granot loma see 72_tc_411 holding that a taxpayer’s books_and_records should enable the taxpayer to cut expenses increase profits and evaluate the overall performance of the operation affd without published opinion 647_f2d_170 9th cir lfi did not engage in any market studies or meaningful research regarding the likelihood of operating granot loma as a commercial lodge for profit it did not set the per capita charges billed to petitioner’s other companies by analyzing what was necessary to turn a profit or even by analyzing lfi’s total operating costs as best we can ascertain from the record lfi made no meaningful effort to evaluate the cost efficiency of capital expenditures or to cut the costs of operating the lodge neither petitioner nor any of his principal advisers had any material experience operating a hotel motel or other commercially viable lodging establishment some of petitioner’s equipment and system suppliers had commercial experience but only insofar as the design and use of such equipment and systems were - -- concerned the only person with resort management experience whom petitioner apparently consulted visited granot loma once and merely opined that the property might be used as a resort property without any apparent analysis of the pertinent financial data and without the benefit of any market study into the feasibility of operating such a resort profitably petitioner has conceded that granot loma was never operated as a commercial resort and that only invited guests stayed there during the years at issue in testimony at trial that concession was explained at least in part by the admission that petitioners did not want to open granot loma to uninvited guests because it would interfere with their use of the property the evidence also suggests that during the years at issue lfi did not have the licenses and permits to operate a commercial facility required under michigan state law that granot loma was not insured for business use and that lfi did not file state liquor tax returns or collect sales_tax on its purported gross_receipts although petitioner vociferously proclaimed throughout the trial that lfi operated granot loma for profit and was a real business lfi did not take even the most minimal of steps under michigan state law to make its alleged rental_activity function like a real business petitioner argues that lfi made changes in its operation of granot loma to foster profitability the principal change he -- - cites was the annual increase in the per capita rate charged for a visit to granot loma while it is true that lfi increased the per capita rate on an annual basis from through the increases were not supported by any meaningful economic analysis and the rate increases did not have a material impact on lfi’s profitability petitioner also argues that when he purchased granot loma he intended to earn a profit from the property at least in part by renovating and selling it as a commercial property petitioners paid dollar_figure for the property invested approximately dollar_figure more in renovation costs and expended millions more in operating costs from through petitioner has not convinced us that he purchased granot loma with any intention of selling it at a profit as opposed to using it as a residence or that he seriously believed that any appreciation in the fair_market_value of granot loma would be sufficient to offset the cumulative losses and generate a profit petitioner correctly points out that his and lfi’s intention to make a profit from granot loma need not be reasonable and he argues that the considerable time he spent working on lfi’s alleged business activities provides objective support for his subjective statement of intent we reject this argument because like much of the evidence petitioner cites in support of his arguments the evidence of time spent by petitioner on lfi’s - - alleged business activities is inadequate ambiguous and unconvincing for example although petitioner and his family made several visits to granot loma during the renovation period petitioner kept no log or other records of the actual time he spent on the renovation effort moreover even if we were willing to accept petitioner’s undocumented claims of time spent on the renovation effort petitioner’s involvement with and supervision of the renovation was completely consistent with the desire of any homeowner to make informed decisions regarding the nature and manner of the work to be done and to monitor the renovation on his home the ambiguous nature of petitioner’s testimony renders petitioner’s testimony unconvincing and not credible respondent presented a much more compelling picture of the reality of granot loma in addition to the regular use of granot loma by petitioner and his family friends and business acquaintances respondent introduced evidence showing the following petitioner’s accountant conservatively concluded that the vast majority of visits paid for by petitioner’s companies were for petitioners’ personal_use of granot loma during the years at issue petitioner was a man of considerable financial means who earned millions of dollar each -- - year from his bond trading activities and who offset his earned_income with over dollar_figure of lfi’s losses petitioner insured granot loma as a second residence and certain personal_property at granot loma as his personal and insurable property lfi did not generate a profit from its alleged operation of granot loma during any year at issue petitioners never transferred granot loma’s legal_title to lfi and petitioner and his family friends and business acquaintances derived considerable personal pleasure from their use of granot loma on balance we conclude that petitioner has failed to prove by a preponderance of evidence that lfi was engaged in the conduct_of_a_trade_or_business under sec_162 or that any activity allegedly conducted by lfi at granot loma was an activity for profit consequently we sustain respondent’s determination that lfi was not engaged in an activity for profit b respondent’s determinations with respect to lfi for and sec_183 disallows all expenses attributable to an activity_not_engaged_in_for_profit except as provided in sec_183 b sec_183 allows those deductions which are not even if we were to reach petitioner’s sec_212 argument we would still conclude on this record that lfi was not engaged in an activity for profit -- - dependent upon a profit_motive such as interest and taxes sec_183 allows the deductions that would be allowable only if the activity was engaged in for profit but only to the extent that gross_income derived from the activity exceeds the deductions permitted by sec_183 b for and respondent disallowed all of lfi’s deductions determined lfi’s corrected s_corporation income and adjusted petitioner’s income accordingly in so doing respondent does not appear to have allowed petitioner any adjustment for allowable deductions under sec_183 except with respect to granot loma’s real_estate_taxes ’ this approach appears to be inconsistent with the approach taken by respondent for and which effectively allowed petitioner to deduct lfi’s expenses to the extent of lfi’s income ’ respondent takes the position that lfi did not own granot loma and consequently may not deduct depreciation attributable to the property respondent also contends that lfi’s other expenses were not substantiated that personal and capital expenditures are not deductible and that petitioner failed to allocate and prove which deductions if any are not for personal 8for each of the years at issue respondent increased petitioner’s real_estate tax deduction on schedule a of petitioner’s federal_income_tax returns for the real_estate_taxes attributable to granot loma presumably because he determined petitioner owned granot loma respondent also disallowed petitioner’s deduction of lfi’s loss for however lfi did not report any income for -- -- expenditures respondent nevertheless allows petitioner to offset lfi’s income with lfi’s expenses for and but not for or petitioner contends that although legal_title to granot loma was never transferred to lfi lfi owned a beneficial and depreciable_interest in the property and that lfi should be allowed to deduct depreciation to the extent provided in sec_183 b petitioner relies on several cases for the proposition that command over property or enjoyment of its economic benefits marks the real owner for federal tax purposes see 630_f2d_554 7th cir quoting 164_f2d_870 7th cir affg t ccc memo 95_tc_74 petitioner however has failed to convince us that lfi owned any beneficial_interest in granot loma the record instead persuasively establishes that petitioners personally controlled used and enjoyed granot loma throughout the years at issue regarding lfi’s other deductions petitioner did not address respondent’s argument that those deductions were unsubstantiated ordinarily a taxpayer is required to substantiate claimed deductions see sec_1_6001-1 income_tax regs in this case the parties did not stipulate that lfi incurred any expenses and because petitioners introduced no evidence at trial to prove the nature and amount of lfi’s expenses we would -- - ordinarily hold that petitioner has failed to prove that lfi paid_or_incurred any expenses in excess of those allowed by respondent in this case however because the notices of deficiency take what appear to us to be inconsistent positions with respect to lfi’s expenses and in our view appear to acknowledge petitioner’s entitlement to a deduction for a portion of lfi’s expenses under sec_183 for and we shall require respondent to make adjustments for and under sec_183 comparable to those made for and c the parties’ other arguments we decline to address the parties’ other arguments regarding lfi as our holdings under sec_162 and sec_183 adequately dispose_of the lfi issues raised by the parties ii bac issues in the notices of deficiency respondent recalculated bac’s taxable_income by disallowing all of bac’s expenses and making certain adjustments to income increased petitioner’s income by his distributable share of bac’s corrected s_corporation income and allowed petitioner additional miscellaneous schedule a deductions to the extent of petitioner’s distributable share of bac’s income for each of the years at issue for example the notices of deficiency allege generally that lfi’s losses and or expenses were not substantiated but allow petitioner an adjustment under sec_183 for some of the years at issue - al --- in an amendment to petition filed pursuant to a motion for leave to amend petition that we granted petitioner alleged that he was not entitled to bac’s passthrough losses reasoning that bac did not have a valid s_corporation_election on file at any time during the relevant taxable years and asserted that we lacked jurisdiction over respondent’s bac adjustments because respondent never issued a notice_of_deficiency to bac as ac corporation respondent filed a notice of objection raising the affirmative defenses of equitable_estoppel and the duty_of_consistency and an amendment to answer that clarified that he had not placed the status of bac as an electing_corporation under subchapter_s at issue in the consolidated cases sec_1362 provides that small_business corporations may elect to be governed by the provisions of subchapter_s and to be taxed thereunder as passthrough entities for such an election to be valid all shareholders of the corporation as of the date the election is made are required to consent to the election sec_1362 560_f2d_687 5th cir affg tcmemo_1975_92 the parties agree that mrs baldwin did not sign the form_2553 the parties do not agree however as to whether respondent may continue to treat bac as an s_corporation for the years at issue we examine the duty_of_consistency to resolve the dispute - -- a the duty_of_consistency the duty_of_consistency sometimes referred to as quasi- estoppel is an equitable doctrine that federal courts historically have applied in appropriate cases to prevent unfair tax gamesmanship 884_f2d_959 7th cir affg 87_tc_1087 105_tc_324 103_tc_525 affd 100_f3d_778 10th cir the duty_of_consistency doctrine is based on the theory that the taxpayer owes the commissioner the duty to be consistent in the tax treatment of items and will not be permitted to benefit from the taxpayer’s own prior error or omission cluck v commissioner supra pincite it prevents a taxpayer from taking one position on one tax_return and a contrary position on a subsequent return after the limitations_period has run for the earlier year if such contrary position would harm the commissioner id this case is appealable to the court_of_appeals for the seventh circuit in kielmar v commissioner supra pincite the court_of_appeals for the seventh circuit held that a taxpayer is placed under a duty_of_consistency when there has been a representation or report by the taxpayer on which the commission has relied and an attempt by the taxpayer after the period of limitations has run to change the previous representation or to recharacterize the situation in such a way -- - as to harm the commissioner because the duty_of_consistency is an affirmative defense respondent bears the burden of proving that it applies rule a from until approximately month before trial petitioner consistently represented to respondent that bac was an s_corporation petitioner initially caused form_2553 election by a small_business_corporation which indicated that mrs baldwin was bac’s sole shareholder and that she had the authority to elect s_corporation status for bac to be filed on behalf of bac petitioner also caused bac to file forms 1120s u s income_tax return for an s_corporation and deducted bac’s passthrough losses on his form sec_1040 u s individual_income_tax_return for the years at issue petitioner did not inform respondent during the audit that the validity of bac’s s_corporation_election was an issue petitioner also represented under oath in formal discovery proceedings in this case that bac was an s_corporation petitioner now seeks to repudiate bac’s s_corporation status in an effort to deprive this court of jurisdiction over the bac issues and respondent of the opportunity to obtain a ruling on the bac issues raised in this case petitioner argues that the duty_of_consistency does not apply because respondent has failed to prove that respondent reasonably relied upon bac’s s election when issuing the notices - of deficiency or that respondent suffered any harm as a result of his reliance petitioner also contends that the duty_of_consistency does not apply because petitioner did not intentionally misrepresent bac’s s status or even know that bac’s s election was improper petitioner’s argument that respondent could not have reasonably relied upon bac’s s_corporation_election when issuing the notices of deficiency because respondent knew or had reason to know the s election was invalid is based on the testimony of his accountant mr dimaggio mr dimaggio testified that the auditing agent ms witek became aware of a problem with bac’s s_corporation_election by watching petitioners’ divorce proceeding in taking mr dimaggio’s testimony in context it appears that the problem mr dimaggio described in his testimony involved a dispute between petitioners regarding the ownership of bac not the validity of its s election even if we were to believe mr dimaggio’s testimony that ms witek somehow became aware of a dispute between petitioners regarding the ownership of bac we disagree with petitioner’s conclusion that such knowledge put respondent on notice regarding a problem with bac’s s election although petitioners raised an issue regarding which one of them owned bac during the pendency of the divorce case neither petitioner raised or acknowledged any issue concerning the -- validity of the s election or conceded that the s election was invalid until approximately month before trial in fact petitioner continued to claim that bac was an s_corporation and to deduct bac’s losses on his tax returns in and later years because the record contains no credible_evidence that respondent knew or had reason to know that bac’s s election was invalid until approximately month before the trial in this case we reject petitioner’s reliance argument we also reject petitioner’s argument that respondent has not shown he suffered any harm as a result of petitioner’s representation petitioner contends that even as a c_corporation bac would have no taxable_income because bac’s deductions exceeded its income for the years at issue petitioner’s argument ignores the fact that respondent disallowed all of bac’s deductions vigorously litigating in a 2-week trial among other issues whether bac’s activities were engaged in for profit whether bac’s deductions were ordinary and necessary lunder sec_1362 once a valid s election has been made ownership of an s_corporation may change without adversely affecting the s election because new owners were not required to consent to the prior s election see sec_1_1362-6 income_tax regs we also note that mr dimaggio’s testimony conflicted with the objective facts in the record concerning petitioner’s divorce case mr dimaggio testified that ms witek learned about a problem with bac in while observing the divorce trial yet the trial in the divorce case did not occur until -- - business_expenses whether bac’s deductions were substantiated and whether the claimed losses were passive losses under sec_469 if we were to accept petitioner’s concession and refuse to apply the duty_of_consistency respondent would be deprived of the opportunity to evaluate bac’s correct_tax status or to determine the proper tax effect of bac’s activities for the years at issue this is so at least in part because if bac were a c_corporation as petitioner contends the limitations_period for assessing income_tax deficiencies at the corporate level would have expired the record reveals that respondent relied on petitioner’s representations regarding bac’s s status to his detriment and we so find finally we reject petitioner’s argument that because he was not aware of any problem with bac’s s_corporation_election prior to he did not have personal knowledge of bac’s failed s_corporation_election until after the audit was completed and the period of limitations had run for the years at issue although petitioner’s argument implies to the contrary personal knowledge is not an element of the duty_of_consistency 884_f2d_959 7th cir the duty_of_consistency may apply to a taxpayer who innocently misrepresents a fact in a time-barred year and to one who misleads intentionally 495_f2d_211 8th cir 72_tc_807 affd 656_f2d_483 9th cir -- - respondent has demonstrated that each of the elements of the duty_of_consistency identified in kielmar v commissioner supra exists in this case first petitioner consistently represented bac as an s_corporation for federal_income_tax purposes by filing forms and 1120s and by treating it as a passthrough_entity for tax purposes second respondent has relied upon these representations to his detriment by auditing bac as an s_corporation making adjustments thereto and adjusting the income of bac’s sole shareholder as if he were a shareholder in an s_corporation third petitioner has altered his previous representation that bac was a valid s_corporation during each of the years at issue in favor of the diametrically opposite representation that bac was never a valid s_corporation this alteration occurred after the period of limitations on assessment with respect to bac’s returns if bac were a c_corporation had expired see sec_6501 on these facts we hold that the duty_of_consistency applies and that therefore petitioner is estopped from claiming that bac was not a valid s_corporation for the years at issue b bac losses because bac is treated as an s_corporation for purposes of this case we must next address the substance of the parties’ arguments with respect to bac respondent contends that bac did not conduct a trade_or_business under sec_162 or an activity -- - engaged in for profit under sec_183 and that therefore he properly disallowed bac’s expenses and recomputed bac’s income petitioner asserts that bac was operated as a trade_or_business and that its profit_motive is demonstrated by a variety of factors including bac’s effect on the increased profitability of petitioner’s related businesses activity_not_engaged_in_for_profit we have already reviewed the relevant law governing our analysis under sec_162 and sec_183 in connection with our holding regarding petitioner’s deductions of lfi’s losses we shall not repeat that discussion here we turn instead to our analysis of whether bac was a trade_or_business under sec_162 or an activity_not_engaged_in_for_profit under sec_183 in support of his argument that bac engaged in its air transportation activity for profit petitioner contends that bac maintained adequate business records periodically consulted with and relied upon experts to operate the activity and to improve its finances and regularly increased the per-person fees charged to its customers to improve its cashflow respondent contends that bac was nothing more than a convenient and tax-favorable way for petitioner and his family friends and business acquaintances to travel to and from granot loma and other vacation sites respondent relies primarily upon bac’s history of substantial losses in each of the years at issue petitioner’s --- - financial status and income during the years at issue bac’s and petitioner’s failure to follow the advice of bac’s president regarding steps that should be taken to make bac a profitable venture and the substantial personal_use of bac’s aircraft by petitioner and his invited guests our review of the record in this case confirms that bac was not an activity engaged in for profit but rather was an activity established structured and operated primarily for the personal_use and benefit of petitioner we reach this conclusion by applying the factors set forth in sec_1_183-2 income_tax regs to the extent pertinent to our analysis to the relevant facts established by the record after petitioners purchased granot loma in petitioner decided to purchase the first of two aircraft on date petitioner purchased a king air and formed bac to own and operate the aircraft in date bac traded in the king air for the sabre petitioner regularly used bac’s sabre to transport himself and his family friends and business acquaintances to granot loma in an effort to structure the operation and use of the sabre as a business petitioner arranged for bac to invoice one of his other companies each time the sabre was used at no point during any of the years at issue did bac offer the sabre for charter by third parties or take the steps necessary to position the sabre for use ina charter or leasing business -- - nevertheless in petitioner’s accountant represented to respondent that bac operated as a charter service and bac made similar representations concerning the nature of its business on its tax returns although bac maintained extensive accounting_records as well as separate books of account and a separate checking account bac did not consistently generate invoices to petitioner’s other companies until date after date bac did not include passenger names other than petitioner’s in the aircraft utilization reports and trip recaps maintained by bac bac did not maintain any records regarding the nature of the trips taken on its aircraft bac simply contends that each trip was a business trip because bac charged a fee for everyone who used its aircraft the record contains no credible_evidence indicating that bac ever developed a business plan or that it engaged in any market analysis before setting its per-passenger rates although bac increased its per-passenger rates three times during the years at issue the rate increases were implemented without any market studies in an effort to successfully withstand any level of irs scrutiny bac did not take any additional steps to increase its income or reduce its expenses despite advice from both petitioner’s accountant and david stubbs bac’s pilot and -- - president in june and date that bac’s continued losses could have potentially disastrous adverse tax effects the record in this case amply demonstrates that petitioner’s use of bac’s aircraft was primarily for personal purposes that fact combined with bac’s history of substantial losses which petitioner used to offset his considerable income from trading during the years at issue leads us to the conclusion that bac did not engage in its air transportation activity with the intent of making a profit relationship between bac’s activity and petitioner’s related businesses petitioner asserts that bac’s profit_motive is demonstrated by the sabre’s effect on the increased profitability of petitioner’s related businesses petitioner cites 868_f2d_833 6th cir affg in part and 22tn a memorandum dated date to petitioner mr stubbs outlined three options for turning bac into a profit center the three options consisted of the manipulation of company chargeback rates to ensure that bac was profitable the operation of bac as a charter service and the implementation of a timesharing plan with respect to the sabre bac did not implement any of the proposals in another memorandum dated date mr stubbs expressed continuing concern over bac’s reliance on loans from petitioner and bcc to cover bac’s expenses and recommended a large increase in the rates charged to petitioner’s other companies mr stubbs noted however that faa restrictions on passenger fees would force bac to charge lower fees to outsiders in response bac increased its intercompany charges from dollar_figure per flight hour in to dollar_figure per flight hour in and to dollar_figure per flight hour in these rate increases did not eliminate bac’s losses bac’s losses in dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure exceeded dollar_figure million in the aggregate - - revg in part tcmemo_1986_569 for the proposition that the entire economic relationship of related companies must be analyzed when making a determination regarding profit motivation petitioner also relies upon several cases holding that the taxpayer had a bona_fide profit_motive in what he contends are similar situations see eg 797_f2d_1049 d c cir 35_tc_231 kuhn v commissioner tcmemo_1992_460 lee v commissioner tcmemo_1986_294 louismet v commissioner tcmemo_1982_294 the cases cited by petitioner are readily distinguishable because none of the cases involved an alleged business activity conducted primarily for the personal benefit of the owner for example in campbell v commissioner supra the court_of_appeals for the sixth circuit held that a taxpayer could deduct losses from a partnership where the partnership’s only business_purpose was to lease an airplane to a corporation controlled by the partners of the partnership the corporation’s employees and officers engaged in extensive air travel in furtherance of the corporation’s business and used the partnership’s airplane to facilitate that travel despite repeated losses in the partnership the court_of_appeals found a profit_motive by considering the overall increase in wealth of the partners through the corporation accomplished through the use of -- - transportation and communication efficiencies provided by the partnership airplane in addition the court_of_appeals found that losses were due in large part to the dramatic rise in the cost of fuel inflation and increased interest rates occurring during the late 1970s and early 1980s the court_of_appeals concluded that profits generated by the corporation through the use of the partnership’s plane justified a conclusion that the partnership venture was an activity engaged in for profit in contrast to the taxpayer in campbell petitioner has not proven even an incidental benefit to his commodities trading business or any other business resulting from bac’s activities petitioner testified that his unparalleled trading success was due to his relationships with other traders and brokers in the pit and that his discussions with traders and brokers on the plane trips to and from granot loma enabled him to build close personal relationships with the brokers and traders however the objective facts in the record demonstrate that after petitioner purchased the king air and organized bac in petitioner’s income from his commodities trading business steadily decreased also unlike the situation in campbell where the plane leasing partnership was conducted solely to benefit another business and was wholly dependent upon that business bac was conducted almost exclusively to benefit petitioner personally a -- -- corporation that is operated for the pleasure or recreation of its shareholders is not engaged in a trade_or_business 275_f2d_578 7th cir affg tcmemo_1958_104 the extensive personal_use of bac’ss aircraft by petitioner and his family friends and business acquaintances coupled with petitioner’s failure to prove a legitimate economic connection between his successful commodity trading business and bac convinces us that bac’s air transportation activity was not an activity engaged in for profit conclusion after considering the factors listed in sec_1_183-2 income_tax regs we hold that bac was not engaged in an activity for profit we decline to address respondent’s other arguments with respect to the bac adjustments because our conclusion under sec_183 adequately disposes of respondent’s adjustments with respect to bac ' pursuant to sec_183 respondent has allowed petitioner additional miscellaneous_itemized_deductions for bac’s expenses in amounts equal to bac’s corrected s_corporation income in each of the years in dispute before application of the 2-percent adjusted_gross_income limitation of sec_67 consequently we do not separately address the parties’ arguments regarding the calculation of bac’s depreciation deduction under sec_280f or the ownership of the cessna that was depreciated by bac iii bcc issues respondent disallowed lodging and travel deductions in the amounts of dollar_figure dollar_figure and dollar_figure that bcc claimed on its and returns respectively respondent alleged that the deductions were not allowed because they did not meet the requirements of sec_162 and sec_274 petitioner did not address the bcc adjustments in either his opening brief or his reply brief consequently we deem petitioner to have conceded the adjustments to bcc’s lodging and travel deductions see 92_tc_661 89_tc_46 iv penalties and additions to tax a sec_6661 addition_to_tax for respondent determined petitioners are liable for the substantial_understatement addition_to_tax under sec_6661 sec_6661 imposes an addition_to_tax in an amount egual to percent of any underpayment attributable to such substantial_understatement a substantial_understatement exists when the amount of tax required to be shown on a taxpayer’s return exceeds the amount shown on the return by the greater of dollar_figure or percent of the amount of tax required to be shown on the return sec_6661 schirmer v commissioner 89_tc_277 -- - an understatement for purposes of sec_6661 does not include any item for which the taxpayer’s return position was supported by substantial_authority sec_1 a income_tax regs substantial_authority exists when the weight of authorities supporting the treatment is substantial in comparison to the weight of authorities supporting contrary positions sec_1 b income_tax regs a position that is arguable but fairly unlikely to prevail in court will not be considered as supported by substantial_authority id a case having some facts in common with the tax treatment at issue does not constitute authority if the case is materially distinguishable on its facts sec_1 b income_tax regs petitioner does not rely on any cases which individually or collectively gqualify as substantial_authority for his reporting position either with respect to the lfi adjustments or the bac adjustments petitioner cites 868_f2d_833 6th cir revg tcmemo_1986_569 for the proposition that the entire economic relationship of related companies must be analyzed when making a determination regarding profit motivation petitioner also relies on several cases holding that the taxpayer had a bona_fide profit_motive in what he contends are similar situations see eg 797_f2d_1049 d c cir 35_tc_231 kuhn v commissioner t c -- - memo lee v commissioner tcmemo_1986_294 louismet v commissioner tcmemo_1982_294 we agree with respondent that the cases are not substantial_authority in favor of petitioner’s position because they are all readily distinguishable sec_1 b income_tax regs sec_6661 authorizes respondent to waive part or all of this addition_to_tax upon a showing by the taxpayer that he had reasonable_cause for the understatement and that he acted in good_faith respondent’s failure to waive the addition_to_tax under sec_6661 is subject_to review only for abuse_of_discretion 91_tc_1079 parsons v commissioner tcmemo_2000_205 petitioner did not show that he ever requested a waiver under sec_6661 or that respondent ruled on such a waiver even if petitioner had requested a waiver under sec_6661 as he seems to suggest petitioner has not proven he is entitled to relief under sec_6661 we hold that petitioner is liable for the addition_to_tax under sec_6661 for if the rule computation shows a substantial_understatement_of_income_tax b sec_6653 addition_to_tax for negligence and sec_6662 accuracy-related_penalty for respondent also determined that petitioner is liable for an addition_to_tax for negligence or intentional disregard under sec_6653 for respondent - -- determined that petitioner is liable for the accuracy-related_penalty under sec_6662 alleging that all of the underpayment for is due to negligence or disregard of rules or regulations and you have not established that such underpayment_of_tax was due to reasonable_cause for each of the years through respondent determined that petitioner is liable for the accuracy-related_penalty under sec_6662 alleging that all or part of petitioner’s underpayment_of_tax for each of the years at issue is attributable to one or more of negligence or disregard of rules or regulations any substantial_understatement_of_income_tax or any substantial_valuation_overstatement as in effect for sec_6653 provides that if any part of an underpayment_of_tax is due to negligence or disregard of rules or regulations an amount equal to percent of the underpayment shall be added to the tax for purposes of sec_6653 negligence is defined as a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 and includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code the code sec_6653 as in effect for and sec_6662 a imposes a 20-percent accuracy-related_penalty on the portion of --- - an underpayment that as pertinent here is due to negligence or intentional disregard of rules or regulations sec_6662 b a substantial_understatement_of_income_tax sec_6662 b or a substantial_valuation_misstatement sec_6662 b an underpayment is not attributable to negligence or intentional disregard substantial_understatement_of_income_tax or a valuation misstatement under sec_6662 to the extent that the taxpayer shows that he had reasonable_cause for the underpayment and that he acted in good_faith with respect to such underpayment sec_6664 sec_1_6662-3 sec_1_6664-4 a income_tax regs to prove he had reasonable_cause for an underpayment a taxpayer must show that he exercised ordinary business care and prudence with respect to the disputed item 469_us_241 see also 115_tc_43 in this case petitioner bears the burden of proving that he is not liable for the addition_to_tax under sec_6653 and the for purposes of sec_6662 negligence is defined to include any failure to make a reasonable attempt to comply with the provisions of the code and disregard is defined to include any careless reckless or intentional disregard sec_6662 for purposes of sec_6662 there is a substantial_understatement_of_income_tax for any taxable_year if the amount of the understatement exceeds the greater of percent of the tax required to be shown on that year’s tax_return or dollar_figure sec_6662 a for purposes of sec_6662 a valuation misstatement is as defined in sec_6662 - - penalties under sec_6662 rule a 125_f3d_551 7th cir affg tcmemo_1995_554 942_f2d_444 7th cir affg 94_tc_96 a taxpayer’s good_faith reasonable reliance on the advice of an independent professional as to the tax treatment of an item may establish that the taxpayer was not negligent under sec_6653 and may satisfy the reasonable_cause exception of sec_6664 united_states v boyle supra sec_1_6664-4 income_tax regs whether a taxpayer reasonably relied on an independent and competent professional requires an examination of the facts and circumstances of his case and applicable law see sec_1_6664-4 b income_tax regs the taxpayer must prove the adviser was a competent professional who had sufficient expertise to justify the taxpayer’s reliance on him the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 94_tc_473 citing 59_tc_473 in support of his determinations respondent emphasizes petitioner’s burden_of_proof as to the addition_to_tax and penalties lists numerous errors and purported errors on petitioner’s returns and asserts that petitioner with the assistance of mr dimaggio concocted an elaborate scheme to disguise and deduct personal expenditures petitioner contends -- - that his deductions were claimed in good_faith and pursuant to his reasonable reliance upon his professional tax adviser mr dimaggio and his lawyers although petitioner places the blame for erroneous reporting positions on both his accountant and his attorney petitioner directs most of the blame to his accountant mr dimaggio petitioner claims among other things that it was mr dimaggio who decided to treat lfi and bac as businesses under sec_162 who decided that lfi and bac met the material_participation requirements of sec_469 and who decided to treat bac as an s_corporation for federal tax purposes petitioner also claims that he reasonably relied upon his accountant for all decisions regarding the proper tax treatment of lfi and bac mr dimaggio testified extensively at the trial in this case although mr dimaggio admitted that he consulted with petitioner concerning lfi and bac at no point during his testimony did mr dimaggio admit that he was responsible for the reporting positions taken on petitioner’s returns with respect to lfi and bac mr dimaggio’s testimony only reinforces the impression left by the record as a whole that he did not have accurate information regarding the use of granot loma and the aircraft and that petitioner intended from the time he purchased granot loma and the aircraft to claim they were business_assets used in a business activity for example although mr dimaggio never visited granot loma during the years at issue mr dimaggio -- - testified that granot loma operated no differently than a marriott or a radisson mr dimaggio also testified that lfi was operating as a business during because people were staying up there overnight stays for business purposes in justifying the decision to depreciate granot loma mr dimaggio testified that the property was placed_in_service from a business standpoint the minute mr baldwin purchased it a position petitioner consistently espoused throughout the trial and briefing of this case petitioner was obligated to prove that he gave all pertinent information necessary to decide the proper tax treatment of granot loma and the aircraft to mr dimaggio mr dimaggio’s testimony leaves us with considerable doubt that petitioner gave mr dimaggio all of the information necessary to determine whether and to what extent lfi and bac were actually operating a trade_or_business within the meaning of sec_162 or whether the activities conducted by the corporations were not engaged in for profit within the meaning of sec_183 having observed mr dimaggio and petitioner at trial and heard their testimony we have no doubt that petitioner was an important and demanding client of mr dimaggio that mr dimaggio wanted to keep petitioner happy and that mr dimaggio without having first received relevant and accurate information either concluded or accepted petitioner’s conclusion that lfi and bac were legitimate businesses mr dimaggio’s apparent willingness -- - to treat lfi and bac as businesses under sec_162 and to ignore his concerns regarding the possible application of sec_183 without a healthy degree of skepticism and some meaningful professional analysis falls short of proof establishing that petitioner reasonably relied on the informed and studied advice of a competent tax professional we also have considerable doubt whether petitioner acted in good_faith when he signed his tax returns for the years at issue petitioner an experienced businessman knew or certainly should have known that he and his family and invited guests used granot loma and bac’s aircraft primarily for personal relaxation and entertainment possessed of such knowledge petitioner cannot credibly claim that he signed his tax returns in good_faith under the circumstances petitioner’s attempt to avoid liability for the additions to tax and penalties by claiming he did not know any better is ludicrous because petitioner has failed to prove that he was not negligent under sec_6653 and sec_6662 or that he is entitled to relief under sec_6664 we reject petitioner’s arguments that he should be relieved of the sec_6653 addition_to_tax and the sec_6662 penalties in these consolidated cases v conclusion we have carefully considered the remaining arguments of both parties for results contrary to those expressed herein and to the extent not discussed above find those arguments to be irrelevant moot or without merit to reflect the foregoing and concessions by both parties decisions will be entered under rule