internal_revenue_service department of the treasury number release date index numbers 280g washington dc person to contact telephone number refer reply to cc tege eb ec-plr-114891-00 date date parent sub target_corporation a executive m date date date date date x this is in response to your letter of date requesting rulings under sec_280g of the internal_revenue_code specifically you requested a ruling whether under the facts outlined below the parachute_payment made to executive upon the change_of control of target can be reduced by the application of section plr-114891-00 280g-1 of the proposed income_tax regulations q a sec_11 or sec_24 the facts as submitted are set forth below on date executive the president of target entered into an employment agreement with target a wholly owned subsidiary of corporation a the employment agreement which set forth a minimum annual salary plus bonus was to run through date the employment agreement provided in part that for the term of the employment agreement and for months following the cessation of executive’s employment by target executive would not compete directly or indirectly with target the employment agreement also provided that if target or a majority of its capital were sold exchanged or traded to a new owner and executive’s powers position compensation duties or physical location would be changed considerably executive could treat this as a termination by target of the employment agreement in such case target would be required to pay executive for the remainder of the contract term on date parent made a tender offer to buy all the outstanding shares of corporation a parent was primarily interested in acquiring target which it viewed as a good strategic fit with the business of its wholly-owned subsidiary sub parent entered into an agreement with m whereby if parent was successful in acquiring all the stock of corporation a parent would sell the portion of corporation a that was not related to the business of sub to m on date parent acquired the stock of corporation a following parent’s acquisition of corporation a conversations were held between sub and executive as to executive’s employment with sub following the integration of the target business with sub executive’s job duties would change and he would be required to move to a new location consequently on date executive elected to invoke the provisions of the employment agreement and treat his employment as terminated pursuant to the employment agreement executive received dollar_figurex an amount equal to his salary and bonus for the current_year multiplied by the remaining term of the employment agreement you requested rulings as to whether q a sec_11 and sec_24 reduce the portion of the payment that is treated as contingent on the change in ownership or control sec_280g of the internal_revenue_code provides that no deduction will be allowed for any excess_parachute_payment sec_280g of the code defines the term excess_parachute_payment as an amount equal to the excess of any parachute_payment over the portion of the base_amount allocated to such payment plr-114891-00 sec_280g of the code defines the term parachute_payment as any payment in the nature of compensation to or for the benefit of a disqualified_individual if i such payment is contingent on a change i in the ownership or effective_control of the corporation or ii in the ownership of a substantial portion of the assets of the corporation and ii the aggregate present_value of the payments in the nature of compensation to or for the benefit of such individual which are contingent on such change equals or exceeds an amount equal to three times the base_amount sec_4999 of the code imposes on any person who receives an excess_parachute_payment a tax equal to percent of the amount of the payment sec_280g provides that in the case of a parachute_payment described in sec_280g the amount treated as a parachute_payment does not include the portion of the payment that the taxpayer establishes by clear_and_convincing evidence is reasonable_compensation for personal services to be rendered on or after the date of the change_of_ownership or control sec_1_280g-1 q a addresses the types of payments that are deemed to be compensation_for the performance of services and therefore can be regarded as parachute payments q a provides that the performance of services includes holding oneself out as available to perform services and refraining from performing services such as under a covenant_not_to_compete or a similar arrangement consistent with q a for purposes of sec_280g of the code the refraining from the performance of services in compliance with a covenant_not_to_compete should also be considered to be services if the taxpayer establishes by clear_and_convincing evidence that the amounts attributable to such a covenant are reasonable they will not qualify as parachute payments under sec_280g the amount of the parachute_payment if any attributable to a covenant_not_to_compete is a question of fact sec_4 of revproc_2000_3 2000_1_irb_103 provides that the service will ordinarily not issue ruling letters on any matter in which the determination requested is primarily one of fact q a c generally provides that a payment that would have in fact been made had no change in ownership or control occurred is treated as contingent on a change in ownership or control if the change accelerates the time at which the payment is made however the payment that is contingent on the change may be significantly reduced by the rules described in q a c provided that it was substantially certain at the time of the change to have been made without regard to the change if the disqualified_individual had continued to perform services for the corporation for a specified period of time plr-114891-00 q a c was included in the proposed_regulations to reduce the contingent portion of a nonvested payment that had been partially earned by the taxpayer with services but had not been paid this does not occur with amounts paid under an employment agreement because these amounts are paid as they are earned in the case of amounts paid under an employment agreement the operative q a governing these payments is q a b q a b indicates that amounts paid as damages for breach of contract may be reasonable_compensation for personal services to be rendered on or after the date of the change in control if certain requirements are met see sec_280g and b of the code which concern the treatment to be afforded amounts the taxpayer establishes with clear_and_convincing evidence represent reasonable_compensation for services rendered before and after the change_of control q a of the proposed regulation also affects the treatment for purposes of sec_280g of payments for the remaining unearned portions of an employment agreement or amounts paid as severance_pay q a provides that severance payments are not treated as reasonable_compensation for personal services actually rendered before or to be rendered on or after the date of a change_of control based on the information submitted we rule as follows for purposes of sec_280g the term services includes the refraining from the performance of services under a covenant_not_to_compete following a termination of employment accordingly a reasonable value attributable to refraining from performing such services will not be a parachute_payment under sec_280g no opinion is expressed whether the covenant_not_to_compete has any value or what that value may be the amounts paid under the employment agreement that substituted for the compensation that executive would have earned had he continued to perform services for sub for the remainder of the contract term do not qualify for the reduction set out in q a c except as specifically ruled on above no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent the taxpayer should attach a copy of this ruling to any income_tax return to which it is relevant temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not been adopted therefore this ruling will be modified or revoked plr-114891-00 by the adoption of temporary or final regulations to the extent that the regulations are inconsistent with any conclusion in the ruling however when the criteria in section dollar_figure of revproc_2000_1 2000_1_irb_4 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely yours robert b misner assistant chief executive compensation branch office of the division counsel associate chief_counsel tax exempt and government entities enclosure copy for purposes


department of the treasury internal_revenue_service washington d c tax exempt and cover dec uniform issue list terra ts legend taxpayer ira x cpa professional_corporation trust amount k amount l dear this is in response to letters dated date date and date submitted by your authorized representative on your behalf in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer maintained ira x and ira y taxpayer asserts that he received distributions of amount k from ira x and amount l from ira y taxpayer asserts that his failure to rollover these amounts within the 60-day period prescribed by sec_408 of the code was due to incomplete information provided by his cpa and by taxpayer being occupied with the care of his terminally ill wife taxpayer further represents that amount k and amount l have not been used for any purpose other than as an intended ira rollover taxpayer’s wife was diagnosed with a terminal illness in taxpayer asserts that his wife’s illness motivated him to secure his ira in a more stable investment accordingly taxpayer consulted with cpa of professional_corporation received confirmation that the proposed investment was an approved investment vehicle for his ira assets and was told that he would not be subject_to irs taxes since he was younger than age and if he processed the rollover properly in his distracted state taxpayer mistook this information as confirmation that the investment vehicle and final transaction would continue as an ira with follow-up tax compliance by professional_corporation taxpayer relied on professional_corporation for all financial advice the previous years and completed other transfers involving his ira after obtaining prior approval from professional_corporation your submission includes a statement from professional_corporation wherein it represents that taxpayer relied on its advice and that taxpayer was fully convinced that the attempted transaction was a valid rollover on date taxpayer took distributions from ira x in amount k and amount l from ira y these funds were invested in trust on date in an attempt to complete an ira rollover of amounts k and l however taxpayer asserts that during this time he was no longer able to properly concentrate on financial matters because his wife’s condition worsened and he became a full- time care giver for her accordingly taxpayer did not become aware that the investment was not a valid rollover until he received a letter from the internal_revenue_service the service informing taxpayer that he failed to report the distribution of amounts k and l as ira_distributions based on the facts and representations you request a ruling that the service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distributions of amount k from ira x and of amount l from ira y sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if -- i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer is consistent with his assertion that his failure to accomplish a timely rollover of amount k and amount l was caused by the incomplete information provided by cpa and his being occupied with the care of his terminally ill wife therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount k from ira x and amount l from ira y taxpayer is granted a period ending days from the issuance of this ruling letter to contribute amount k and amount l into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution the contribution will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter has been sent to your authorized representative in accordance with a power_of_attorney on file in this office if you have any questions please contact please address all correspondence to se t ep ra t2 vine manager plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc


department of the treasury internal_revenue_service washington d c date number release date cc ebeo uilc internal_revenue_service national_office field_service_advice memorandum for district_counsel from chief branch employee_benefits and exempt_organizations subject sec_119 issue this field_service_advice responds to your electronic mail message dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend taxpayer hotel issue whether sec_119 causes taxpayer’s otherwise personal expenses for meals_and_lodging at taxpayer’s hotel to be deductible expenses on the taxpayer’s federal_income_tax return if these personal living_expenses are not deductible by the taxpayer whether taxpayer is considered an employee of taxpayer’s sole_proprietorship so that the value of the meals_and_lodging are excludable from taxpayer’s gross_income under sec_119 of the code conclusion sec_119 of the code has no affect on whether taxpayer’s expenses for meals_and_lodging are deductible by taxpayer because taxpayer cannot be an employee of taxpayer’s sole_proprietorship accordingly personal living_expenses including the expenses_incurred for meals_and_lodging at the hotel must be eliminated from the costs and expenses reported on the taxpayer’s schedule c because taxpayer cannot be an employee of taxpayer’s sole_proprietorship the exclusion provided under sec_119 of the code is not available to taxpayer facts taxpayer operates hotel as a sole_proprietorship this activity is reported on schedule c of taxpayer’s form_1040 during the years through taxpayer and his spouse lived in the hotel the service proposed an adjustment to the taxpayer’s income based on the value of the lodging provided to taxpayer taxpayer asserts that it is necessary that he be on the premises at all times and therefore the value of the lodging should be excludable under sec_119 of the code as support taxpayer cites 16_tc_130 law and analysis sec_162 of the code provides that there shall be allowed as a deduction all the ordinary and necessary costs paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business however sec_262 of the code provides that except as otherwise provided no deduction shall be allowed for personal living or family_expenses sec_119 of the code provides that there shall be excluded from the gross_income of an employee the value of any meals or lodging furnished to the employee the employee's spouse or any of the employee's dependents by or on behalf of the employer for the convenience_of_the_employer but only if in the case of meals the meals are furnished on the business_premises of the employer or in the case of lodging the employee is required to accept such lodging on the business_premises of the employer as a condition_of_employment 16_tc_130 nonacquiescence 1952_2_cb_5 considered whether the estimated value of the board and lodging provided to a limited_partnership general_partner who lived at the hotel owned and operated by the limited_partnership was includible in the general partner’s gross_income this arrangement was essential in order to properly manage the hotel at all times during the day and night the court held that a partner just as a sole_proprietor can not create income for himself by buying himself meals and providing himself with lodging any more that he can lift himself up by his bootstraps instead the correct adjustment must be a disallowance of the improper deduction in footnote the court notes that i n the case of a sole_proprietor it may be academic whether a claimed deduction is disallowed or offset by an inclusion of income yet the fact remains that it is not income thus the court recognized that an adjustment was necessary to disallow expenses_incurred to provide a personal benefit to the general_partner it merely disagreed with the service’s proposed_adjustment to income revenue_ruling 1953_1_cb_62 holds that where the owner of a hotel lives on the premises the costs including cost of goods wages general_expenses taxes and depreciation attributable to meals lodging and other personal or living accommodations of the owner and his family must be eliminated from the costs and expenses of operating the hotel likewise where a partnership operates a hotel and the managing partner lives on the premises the costs attributable to such accommodations of the resident partner and his family must be eliminated from the operating costs and expenses of the partnership the service’s position in revenue_ruling has been accepted by the courts in several circuit_court cases involving partners who lived in a hotel owned by their partnerships 234_f2d_704 4th cir 236_f2d_595 8th cir commissioner v briggs f2d 10th cir 273_f2d_503 3rd cir although the circuit_court cases cited above involve years before sec_119 of the code became effective in there was a regulation in place which set forth the convenience_of_the_employer test indeed the doak court specifically addressed whether the rule under sec_119 caused the partner’s personal expenses to be deductible the court stated from our reading of the code provision and the regulations then applicable we think it clear that the costs of meals and 1under the code this rule appeared in sec_118 sec_39 a -3 which provided if a person receives as compensation_for services rendered a salary and in addition thereto living quarters or meals the value to such person of the quarters and meals so furnished constitutes income subject_to tax if however living quarters or meals are furnished to employees for the convenience_of_the_employer the value thereof need not be computed and added to the compensation otherwise received by the employees lodging of taxpayer would have been deductible had they occupied the employee status under the above convenience_of_the_employer rule they were not however either employers or employees instead they were husband and wife owning the entity business as partners f 2d pincite thus the court considered the effect of the convenience_of_the_employer rule and determined that it had no effect because the taxpayers could not have employed themselves see also robinson supra pincite for a more recent case taking a similar position on this issue see 845_fsupp_1505 d wyo in dilts the court held that the owner of an s_corporation was not entitled to an exclusion under sec_119 because the court could not fathom any substantive reasons why the owners of a subchapter_s_corporation should be entitled to such exclusions while their neighbors sole proprietors would not be entitled the same exclusions id pincite thus since revenue_ruling was issued in the courts have resolved this issue in a manner consistent with the service’s position the service’s position remains that personal living_expenses of a taxpayer living at a hotel owned by the taxpayer must be eliminated from the costs and expenses of operating the hotel moreover because a taxpayer cannot be an employee of the taxpayer’s sole_proprietorship sec_119 of the code does not cause such expenses to be deductible nor does sec_119 cause the value of meals_and_lodging to be excludable from taxpayer’s gross_income please call if you have any further questions jerry e holmes chief branch employee_benefits and exempt_organizations


t c memo united_states tax_court leonard rabinowitz and m carole rabinowitz petitioners v commissioner of internal revenue respondent docket no filed date william m weintraub and brian wright for petitioners jack h klinghoffer for respondent memorandum findings_of_fact and opinion kroupa judge respondent determined deficiencies of dollar_figure for dollar_figure for dollar_figure for and dollar_figure for in petitioners’ federal income taxes the parties have settled all issues except whether petitioners operated their jet charter activity for profit from through 1all section references are to the internal_revenue_code for the relevant years unless otherwise indicated and all rule references are to the tax_court rules_of_practice and procedure the relevant years we hold that petitioners operated their jet charter activity for profit during each of the relevant years findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated by this reference petitioner leonard rabinowitz mr rabinowitz resided in beverly hills california and petitioner m carole rabinowitz also known as carole little ms little resided in los angeles california at the time petitioners filed the petition in this case petitioners mr rabinowitz began his sales career with a job at his father’s company while still in high school selling paint plastic and tools to automotive repair shops after high school he continued working for his father’s company and then 2the relevant years in this case include and which are not years for which respondent issued a notice_of_deficiency to determine the correct_tax liability for and however the correct net_operating_loss carrybacks must be computed which requires us to determine whether petitioners operated the jet charter activity for profit in and sec_6214 obligates us to consider facts for other years as may be necessary to redetermine the amount of the deficiencies for the deficiency years sec_6214 95_tc_437 therefore we consider whether petitioners operated the jet charter activity for profit in and solely to permit the parties to compute the correct net_operating_loss carrybacks for and pursuant to rule see sec_6214 hill v commissioner supra pincite although respondent issued a notice_of_deficiency to petitioners for respondent did not assert in the notice_of_deficiency that petitioners did not operate the jet charter activity for profit in that year we therefore do not consider whether the activity was operated for profit during for another enterprise selling similar items later he accepted a position selling women’s apparel wholesale for a clothing manufacturer mr rabinowitz developed his sales skills further in positions with several other women’s apparel companies before accepting a sales and merchandising position with jasper brothers of california jasper brothers at jasper brothers mr rabinowitz met ms little a designer at the company ms little was always interested in fashion and hoped to make it a career after brief stints at junior college and studying english literature at ucla she began looking for fashion courses she began studying at la trade tech in the early 1970s after discovering there were no design-specific institutions she originally intended to take just one course at la trade tech but loved her fashion studies so much that she stayed for years and graduated ms little then accepted a position designing women’s apparel at jasper brothers there she met mr rabinowitz and they began a personal relationship their personal and professional relationship would last over years dramatically change their lives and alter the way in which women’s apparel was designed and marketed 3petitioners married each other in late or early and divorced in or although the record does not reflect the exact date of either their marriage or divorce petitioners have maintained their professional relationship and at the time of trial owned studio cl a women’s apparel design and import firm petitioners’ fashion company at jasper brothers mr rabinowitz saw ms little’s design talent and suggested they go into business together so that ms little could design under her own name ms little was excited by the opportunity to design her own line and generally fascinated with fashion and the industry she accepted mr rabinowitz’s plan although she admittedly did not know much about going into business at the time the couple started california fashion industries cfi in petitioners positioned cfi in the higher end of the women’s apparel market cfi designed women’s apparel arranged for its manufacture and distributed the apparel to higher end department and specialty stores cfi had a unique angle on the market by targeting its apparel to the needs and preferences of the baby boomer woman this meant that ms little’s designs gradually evolved over the years so that the apparel would continue to be relevant to the baby boomer woman as she aged from her midtwenties to her thirties and forties and beyond this strategy of building a brand that customers knew and could trust generated considerable loyalty among cfi’s customers in succeeding years while ms little was responsible for the creative end of the business creating both clothing designs and artwork mr rabinowitz put his sales and merchandising talents to use selling 4during the relevant years cfi was an s_corporation and petitioners owned a majority of its stock the apparel to higher end department stores this took a great deal of work in developing contacts and relationships with department store executives mr rabinowitz made a tremendous effort in this respect he even learned to ski so that he could spend more face time with the chairman of cfi’s largest department store customer who had repeatedly invited mr rabinowitz to join him on the ski slopes mr rabinowitz thought that skiing with the chairman might be a good way to develop this important relationship petitioners’ jet charter activity by cfi had grown to dollar_figure million in annual sales and petitioners were looking for new ways to expand their business petitioners realized there was great potential in marketing to middle america and not limiting their sales calls to the east and west coasts of the united_states it was very difficult for mr rabinowitz to make sales calls to companies located in the middle of the country however if he traveled on commercial airlines because of his numerous other responsibilities and time commitments in running cfi for example commercial airline travel did not provide much flexibility in travel arrangements and often required mr rabinowitz to stay overnight an overnight stay on the road was an extraordinary time commitment for a busy executive like mr rabinowitz and not feasible on an ongoing basis petitioners also had encountered difficulties transporting clothing samples and other items to trade shows and events across the country oftentimes things got lost or were delayed which caused petitioners to miss important opportunities to market their clothing line to potential buyers mr rabinowitz was aware of the advantages of chartering private aircraft he had chartered a private aircraft occasionally to attend board meetings for a public company in san jose california petitioners began to charter a jet owned by a third party to use in cfi’s business when needed difficulties with the availability and reliability of those jets however caused petitioners to consider another solution petitioners decided to buy a jet and offer it for charter petitioners thought they could make money in this activity do it better than other aircraft charter companies and at the same time provide a safe aircraft for cfi petitioners purchased a mitsubishi diamond 1-a aircraft the mitsubishi and started beverly hills jet bhj their jet charter activity in petitioners’ business advisers had recommended that petitioners not cause cfi to purchase the aircraft to avoid having to list the jet on cfi’s balance_sheet the goal was to ensure that the jet was not included in a computation of the ratio of cfi’s available capital to fixed assets instead petitioners purchased the mitsubishi individually rather than through cfi the impact on cfi was immediate by the early 1990s cfi’s sales had grown to a peak of over dollar_figure million mr rabinowitz attributed a significant portion of the sales growth to cfi’s use of chartered aircraft using a private jet enabled petitioners to visit department store buyers in cities that could not be reached via commercial airlines in addition petitioners were able to open a flagship carole little store in aspen colorado to showcase their brand and their products this store was one of only one or two that carried the full line of carole little merchandise the store also served as a product testing ground where cfi could test particular items before distributing them nationally with the jet they could quickly visit this store to check on or deliver merchandise examine the store’s appearance and discuss any issues regarding sales of the clothing with the store staff they learned what clothing sold and more importantly why certain clothing did not sell also the arrival of mr rabinowitz on a private jet to make a sales call distinguished him from other salespeople in his buyers’ eyes and allowed mr rabinowitz to call on high-ranking executives to whom he would not otherwise have access ms little was able to make more personal appearances to market her brand in addition because she could bring garments on the jet with her and add finishing touches ms little could devote more time to creating new designs rather than waiting for commercial airlines the jet also cut down on the risk of loss or delay of 5petitioners also had a second home in aspen colorado ms little’s valuable original designs because petitioners could bring them on the jet the garments never were out of their sight cfi became a very lucrative business for petitioners during the relevant years petitioners together earned wages from cfi of dollar_figure to dollar_figure million during each of the years in issue modifications to the jet charter activity after a few years petitioners became concerned that the mitsubishi was not generating sufficient revenue petitioners analyzed both the cost side and the revenue side of their jet charter activity on the cost side petitioners noted that the mitsubishi incurred high fixed costs that generally would not vary according to the size of the aircraft such as a hangar pilots and other full-time employees on the revenue side petitioners recognized that the mitsubishi did not generate many charters the mitsubishi was a smaller aircraft and had a limited range it could travel from the coast only to about midcountry and then needed to be refueled although the time it took to refuel was minimal charter customers preferred to travel nonstop and generally preferred to charter a jet that did not require refueling to travel across the country mr rabinowitz also believed that the mitsubishi was not comfortable for passengers and understood the marketplace was generally interested in chartering larger aircraft therefore petitioners were faced with high fixed costs to own and operate the mitsubishi and low demand to charter such a small jet petitioners explored the idea of purchasing a larger longer range aircraft that they could charter for a higher fee per hour in petitioners purchased a dassault falcon jet the falcon for dollar_figure million petitioners paid part of the purchase_price of the falcon by trading in the mitsubishi mr rabinowitz thought they were getting a good deal on the falcon because the seller us west communications was anxious to purchase a different aircraft initial management of the jet charter activity petitioners initially engaged an outside management firm raleigh enterprises to manage the jet charter activity for the first to months to maximize the charter business petitioners obtained an operating certificate for aircraft chartered to the general_public a rule certificate pursuant to the requirements of the federal aviation administration faa raleigh enterprises assisted with the process of obtaining the rule certificate and also maintained the jet solicited charter business and generally managed the aircraft mr rabinowitz decided to handle these matters himself within a year of purchasing the mitsubishi compliance with faa rules petitioners maintained a rule certificate for their jet because they wanted to make it available for third-party charters see c f_r sec_119 the faa requires a rule certificate for an enterprise to charter an aircraft for profit an enterprise that cannot charter its aircraft for profit such as for example a jet owned by an individual and used only by that individual and family would obtain a certificate under faa rule and a scheduled airline would obtain a certificate under faa rule the faa requirements to maintain a rule certificate are more onerous than the faa requirements for aircraft that are not chartered to the general_public for example the faa requires pilots to be trained to certain standards and also requires higher maintenance standards than those specified for jets not operated with a rule certificate the faa also requires both a maintenance manual and an operations manual to maintain a rule certificate and federal excise_tax must be charged on all flights mr rabinowitz estimated that it cost approximately several hundred thousand dollars per year to maintain a rule certificate pursuant to the faa standards absent the excise_tax marketing of the jet charter activity petitioners marketed their jet charter activity in several ways mr rabinowitz understood from the industry that the most likely charter customers were individuals or companies that themselves owned private aircraft but whose jets were unavailable to them for various reasons therefore mr rabinowitz contacted other aircraft owners to inform them that he had the falcon and a rule certificate and that he would like their business mr rabinowitz also asked the chief pilot to solicit business by contacting other flight departments and pitching bhj when he was not flying the falcon mr rabinowitz paid the chief pilot a commission on flights generated mr rabinowitz developed a marketing campaign including brochures and flyers to solicit charter business petitioners also advertised in the air charter guide a trade publication setting the charter price mr rabinowitz carefully assessed the aircraft charter market to determine the price petitioners should charge for third-party charters of the falcon he ascertained what other owners of similar jets charged and charged a similar rate which was between dollar_figure and dollar_figure per hour mr rabinowitz also ascertained rates other charter businesses charged for a large number of hours per year and decided to charge cfi a type of bulk discount of dollar_figure per hour prices in the industry stayed fairly stagnant during the relevant years petitioners therefore did not change the price they charged cfi during this period employees of the jet charter activity petitioners hired several full-time employees for bhj the employees included a chief pilot a co-captain and an faa certified aircraft and power mechanic also two bookkeepers together worked approximately full time for bhj from when petitioners acquired the falcon mr rabinowitz himself spent approximately hours per week on his bhj activities mr rabinowitz assisted in preparing books_and_records approving flight logs and generating invoices managing the staff payroll and compensation policies engaging in marketing activities serving as liaison with the faa and generally managing the aircraft in addition mr rabinowitz also spent at least hours per week on his work for cfi personal_use of the jet petitioners did use the falcon for some personal travel but not very often each time petitioners used the falcon for personal travel bhj billed them and they paid bhj from their personal checking account petitioners’ accountants verified that an invoice was prepared for personal travel and mr rabinowitz paid the invoices petitioners’ daughter jennifer heft who was a merchandising employee of cfi also made trips in the falcon to meet with ms little concerning various cfi matters bhj billed cfi and cfi paid bhj for each of ms heft’s trips arrangement with verna harrah verna harrah ms harrah a woman mr rabinowitz was dating from through while he was separated from ms little and who was involved in a movie business with mr rabinowitz also owned a jet which cost approximately four times as much as petitioners’ jet ms harrah’s jet had nicer amenities and could fly to europe and south america petitioners agreed with ms harrah that each would look to the other first when they needed to use an aircraft and their own aircraft was busy and that the rate for_the_use_of the other’s aircraft would be the direct costs of operation only direct costs of operation were those costs related to the flying time and included a specified amount for wear_and_tear on the aircraft fuel and engine maintenance direct costs of operation did not include costs fixed and paid annually such as insurance the cost for the hangar and the salaries of the pilots and mechanics petitioners therefore charged ms harrah dollar_figure per hour for_the_use_of the falcon based on the direct costs of operation and ms harrah charged petitioners approximately dollar_figure to dollar_figure per hour for_the_use_of her jet based on the direct costs of operation petitioners made sure however that ms harrah’s request for use of the falcon had least priority such that if a third- party charter customer or cfi had requested the use of the falcon ms harrah would not be able to use it petitioners believed the arrangement was advantageous to them because the agreement enabled them to use a jet worth about four times as much as their own for only about dollar_figure to dollar_figure more per hour petitioners could use ms harrah’s jet for personal travel or could accommodate charter customers on ms harrah’s jet when the falcon was not available success of the jet charter activity petitioners believed bhj would be able to generate a profit if the jet had enough hours of flying and if the activity had the right mix of charters to cfi charters to third parties and charters to ms harrah pursuant to their agreement cfi was treated like any other customer and did not have priority over using the falcon petitioners noted that if a third-party customer wished to book the jet which would be at a higher rate because of cfi’s bulk discount petitioners would schedule cfi’s trip around the third-party customer’s trip in that event cfi could also use ms harrah’s jet at the agreed rate petitioners enjoyed moderate success obtaining third-party customers for bhj john paul mitchell tom hanks don henley jean claude van damme and kenny g all occasionally chartered the falcon petitioners also had several key customers who regularly booked travel on the falcon petitioners encountered some difficulties with the falcon however the u s coast guard had purchased approximately percent of all the dassault falcon 200s sold in the united_states and put them into service flying coastal missions at a low altitude and over the coastline the u s coast guard reported problems with the engine seals as well as engine shutdowns in the aircraft in response to these difficulties the faa required increased maintenance and service of the engines on all dassault falcon 200s including the falcon petitioners owned the negative publicity surrounding the engines impeded petitioners’ charter sales and devalued petitioners’ falcon petitioners considered selling the falcon but they decided to keep the falcon and continue soliciting third-party charters because they were concerned that the negative publicity would depress the sale price mr rabinowitz anticipated a greater return from chartering the aircraft in the meantime than from selling it at a depressed value petitioners suffered a net_loss for each year from through attributable to their jet charter activity during the relevant years bhj had the following gross_income net_loss and net_cash_flow year gross_income loss net_income net_cash_flow dollar_figure big_number big_number big_number big_number dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number repairs and maintenance were the major expenses during the relevant years mr rabinowitz was constantly trying to improve the jet charter activity and remained focused on increasing the bottom line of the combined entities although bhj did not generate a profit mr rabinowitz was pleased with the jet charter activity because of the benefits to cfi mr rabinowitz continued trying to improve bhj’s operations as well sale of cfi and termination of the jet charter activity in date petitioners decided to sell the falcon for dollar_figure million and terminated their jet charter activity petitioners also decided to sell cfi they ultimately sold it to a larger company in date in exchange for stock deductions at issue petitioners filed joint tax returns for each of the relevant years and deducted losses attributable to the jet charter activity respondent disallowed petitioners’ losses relating to the jet charter activity for and in a notice_of_deficiency dated date determining that among other issues petitioners did not engage in their jet charter activity for profit under sec_183 petitioners timely filed a petition with this court seeking redetermination of the disallowed losses and asserting that they engaged in the jet charter activity with the intent of making a profit opinion a whether petitioners operated bhj for profit we are asked to decide whether petitioners operated bhj for profit during the relevant years within the meaning of sec_183 sec_183 provides generally that if an individual engages in an activity and if such activity is not engaged in for profit no deduction attributable to such activity shall be allowed under this chapter except as provided in this section deductions that would be allowable without regard to whether the activity is engaged in for profit shall be allowed under sec_183 and deductions that would be allowable only if the activity is engaged in for profit shall be allowed under sec_183 but only to the extent that the gross_income from the activity exceeds the deductions allowable under sec_183 we follow the court_of_appeals opinion squarely on point when appeal from our decision would lie to that court absent stipulation by the parties to the contrary 54_tc_742 affd 445_f2d_985 10th cir because petitioners reside in the ninth circuit petitioners have the burden of proving that they conducted their activities with the primary predominant or principal purpose of realizing an economic profit independent of tax savings see 4_f3d_709 9th cir affg tcmemo_1991_212 820_f2d_321 9th cir affg tcmemo_1985_197 781_f2d_724 9th cir affg lahr v commissioner tcmemo_1984_472 petitioners do not contend that sec_7491 applies in this case to shift the burden_of_proof to respondent nor have they established they met the requirements of sec_7491 therefore the burden_of_proof remains with petitioners whether a taxpayer has the primary predominant or principal purpose of realizing an economic profit independent of tax savings is determined on the basis of all surrounding facts and circumstances polakof v commissioner supra pincite indep elec supply inc v commissioner supra pincite 78_tc_642 affd without published opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs while a taxpayer’s expectation of profit need not be sec_7491 shifts the burden_of_proof to the commissioner in some circumstances for cases involving examinations that commenced after date see internal_revenue_service restructuring and reform act of publaw_105_206 sec 112_stat_726 reasonable there must be a good_faith objective of making a profit 72_tc_28 sec_1_183-2 income_tax regs we give greater weight to objective facts than to a taxpayer’s statements of intent dreicer v commissioner supra pincite sec_1_183-2 income_tax regs before we address whether petitioners had the primary predominant or principal purpose of realizing an economic profit independent of tax savings we first must address whether cfi and bhj may be treated as one activity respondent argues that we may not aggregate the two activities to determine the profit objective we agree b whether cfi and bhj may be treated as one activity for purposes of sec_183 multiple activities of a taxpayer may be treated as one activity if the activities are sufficiently interconnected sec_1_183-1 income_tax regs in making this determination the most important factors to be considered include the degree of organizational and economic interrelationship of the undertakings the business_purpose served by carrying on the undertakings separately or together and the similarity of the undertakings id the commissioner generally accepts a taxpayer’s characterization of two or more undertakings as one activity unless the characterization is artificial or unreasonable id we have considered those and other factors in determining whether the taxpayer’s characterization is unreasonable these include a whether the undertakings share a close organizational and economic relationship b whether the undertakings are conducted at the same place c whether the undertakings were part of a taxpayer’s efforts to find sources of revenue from his or her land d whether the undertakings were formed as separate businesses e whether one undertaking benefited from the other f whether the taxpayer used one undertaking to advertise the other g the degree to which the undertakings shared management h the degree to which one caretaker oversaw the assets of both undertakings i whether the taxpayers used the same accountant for the undertakings and j the degree to which the undertakings shared books_and_records see 94_tc_41 estate of brockenbrough v commissioner tcmemo_1998_454 we find that it is inappropriate to treat cfi and bhj as one activity for purposes of applying sec_183 cfi and bhj did not share a close organizational or economic relationship cfi was an s_corporation while bhj was a sole_proprietorship although the ownership of cfi and bhj was the same and mr rabinowitz managed both cfi and bhj there was no other organizational relationship between cfi and bhj cfi and bhj also did not have a close economic relationship cfi was a charter customer of bhj as were numerous other third parties cfi and bhj also were not similar activities cfi was engaged in the design and distribution of women’s apparel while bhj was a jet charter service petitioners had a business_purpose for treating cfi and bhj as separate entities petitioners were concerned about the presence of a jet on cfi’s balance_sheet petitioners ensured the activities were treated separately as long as they existed accordingly petitioners caused bhj to invoice cfi for and cfi to pay for each of cfi’s charter flights on the falcon after reviewing the above factors and the facts and circumstances of this case we find it is inappropriate to treat bhj and cfi as one activity for purposes of applying the sec_183 rules see schlafer v commissioner tcmemo_1990_66 sec_1_183-1 income_tax regs accordingly we shall examine whether petitioners engaged in the jet charter activity for profit without consideration of whether petitioners engaged in cfi for profit see sec_1_183-1 income_tax regs c whether petitioners engaged in bhj for profit in determining whether petitioners engaged in the jet charter activity for profit we structure our analysis around nine nonexclusive factors sec_1_183-2 income_tax regs the nine factors are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his or her advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the 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 which are earned the financial status of the taxpayer and whether elements of personal pleasure or recreation are involved id no factor or set of factors is controlling nor is the existence of a majority of factors favoring or disfavoring a profit objective necessarily controlling 32_f3d_94 4th cir affg tcmemo_1993_396 722_f2d_695 11th cir affg 78_tc_471 sec_1_183-2 income_tax regs the individual facts and circumstances of each case are the primary test keanini v commissioner supra allen v commissioner supra pincite sec_1_183-2 income_tax regs petitioners argue that in determining whether they had a primary predominant or principal purpose and intent of realizing an economic profit from the jet charter activity independent of tax savings we should take into account the increased profitability of cfi due to using petitioners’ jet charter service petitioners have proved however that they operated the jet charter activity for profit independent of its effect on the profitability of cfi therefore we do not address this issue d application of the factor sec_1 the manner in which the taxpayer carried on the activity we begin by examining the manner in which petitioners carried on the jet charter activity the fact that a taxpayer carries on an activity in a businesslike manner may indicate a profit objective sec_1_183-2 income_tax regs in determining whether a taxpayer conducted an activity in a businesslike manner we consider whether the taxpayer maintained complete and accurate books_and_records whether the activity was conducted in a manner substantially_similar to comparable businesses that are profitable and whether changes were attempted to earn a profit 72_tc_659 sec_1_183-2 income_tax regs petitioners carried on the jet charter activity in a businesslike manner during the relevant years petitioners sought and obtained a rule certificate from the faa that enabled them to operate bhj as a third-party charter service the faa required petitioners to keep a maintenance manual and an operations manual and also required higher maintenance and pilot training standards to maintain a rule certificate the faa did not impose these requirements on enterprises not maintaining a rule certificate the faa also required petitioners to charge a federal excise_tax on all flights petitioners kept complete and accurate books_and_records for the jet charter activity and employed two bookkeepers approximately full time in the aggregate on this activity during the relevant years petitioners advertised the jet charter activity through various means mr rabinowitz solicited charter business from owners of other aircraft petitioners created flyers and advertisements including an ad in the air charter guide a trade publication and paid the chief pilot on commission to solicit charters petitioners charged varying charter rates to different customers petitioners charged third parties a rate per hour consistent with the price to charter other similar jets petitioners charged cfi a slightly lower rate which was the market rate when a customer booked a large number of flight-hours per year these competitive rates were based on an assessment of the rates others charged to charter similar jets petitioners also entered into the arrangement with ms harrah to accommodate each other on their respective jets if their own were unavailable the arrangement with ms harrah enabled petitioners to provide services to their third-party charter customers on a larger jet in the event the falcon was unavailable and also to use a different jet for personal travel if the falcon was reserved for paying customers in the event petitioners used the falcon for personal travel bhj invoiced petitioners for the travel and petitioners paid for it these sums were included in bhj’s gross_receipts petitioners also made changes to the jet charter activity to try to make it profitable petitioners realized that the initial jet the mitsubishi was not ideal for third-party charters the mitsubishi was not able to fly across the country without stopping to refuel and was uncomfortable for passengers petitioners decided to trade in the mitsubishi for the falcon which did not have these drawbacks in the hope that the falcon would be more attractive to customers and increase petitioners’ third-party charter business the rule certificate and required_documentation books_and_records arm’s length rates charged to charter customers extensive advertising and the changes petitioners implemented all indicate that petitioners operated the jet charter activity in a businesslike manner and support petitioners’ contention that they carried on the jet charter activity for profit the expertise of the taxpayers or their advisers we next consider petitioners’ expertise or the expertise of their advisers in jet charter activities preparing for the activity by extensive study of its accepted business economic and scientific practices and consulting with experts in these matters may indicate that a taxpayer has a profit objective when the taxpayer follows that advice sec_1_183-2 income_tax regs when petitioners began the jet charter activity petitioners initially retained an outside management firm to manage the jet charter activity for the first to months until mr rabinowitz had some experience in the business and could do it himself petitioners also hired several trained staff members to work for the jet charter activity throughout the time they were engaged in the activity including a captain a co-captain a mechanic and two bookkeepers mr rabinowitz also took pains to ensure his decisions were educated decisions about the jet charter activity for example he personally solicited owners of other aircraft as charter customers because he had learned from the industry that these were often the best charter customers both petitioners also have considerable business knowledge and skills not directly related to the jet charter industry petitioners built cfi into an organization that had hundreds of millions of dollars in sales at its peak the skills required to build such a successful business undoubtedly assisted mr rabinowitz in his work for the jet charter activity in addition although mr rabinowitz may not initially have been familiar with the intricacies of the jet charter industry he knew about marketing employee relations and other essential tools necessary to run a business all of which he put to use operating the jet charter activity in sum petitioners hired skilled staff members to assist in operating the jet charter activity mr rabinowitz has also demonstrated that he has considerable business knowledge and undertook efforts to become familiar with industry practice these facts support a conclusion that petitioners operated the jet charter activity for profit the time and effort expended by the taxpayer in carrying on the activity we next consider the time and effort petitioners expended on the jet charter activity a taxpayer’s devotion of much time and effort to conducting an activity particularly if the activity does not have substantial personal or recreational aspects may indicate an intention to derive a profit sec_1_183-2 income_tax regs the fact that a taxpayer devotes a limited amount of time to an activity does not necessarily indicate a lack of profit_motive where the taxpayer employs competent and qualified persons to carry on the activity id mr rabinowitz spent approximately hours per week on the jet charter activity during the relevant years this time was in addition to the approximately hours per week mr rabinowitz spent on cfi’s business mr rabinowitz was involved in every aspect of operating the jet charter business from approving flight logs generating and approving invoices marketing the charter service addressing employee and compensation matters and generally managing the aircraft petitioners also hired three full-time employees to work for the jet charter activity who included a chief pilot a co-captain and a mechanic the two bookkeepers also together spent approximately full time on the jet charter activity taken together mr rabinowitz and bhj’s employees spent a considerable amount of time and effort on the jet charter activity during the relevant years that mr rabinowitz spent so much time on the jet charter activity in addition to his considerable responsibilities for cfi indicates that he did not take the jet charter activity lightly he made a large effort on the jet charter activity in addition to his numerous responsibilities for cfi these facts support petitioners’ contention that they operated the jet charter activity for profit the expectation that the assets used in the activity may appreciate in value we next examine the expectation that the assets used in the jet charter activity may appreciate in value a taxpayer may intend despite the lack of profit from current operations that an overall profit will result when appreciation in the value of assets used in the activity is realized 45_tc_261 affd 379_f2d_252 2d cir sec_1_183-2 income_tax regs neither petitioner testified that he or she expected the falcon to appreciate in value and in fact petitioners ultimately sold the falcon for less than the price at which they had purchased it although mr rabinowitz did suggest that the negative publicity regarding the safety of the falcon depressed the value of the aircraft petitioners did not indicate that they expected the falcon to appreciate in value nor that they considered the possibility that the jet might appreciate in value when they decided to begin the jet charter activity this factor therefore does not support petitioners’ contention that they operated the jet charter activity for profit the success of the taxpayer in carrying on other similar or dissimilar activities we next examine the success of petitioners in carrying on other similar or dissimilar activities if a taxpayer has previously engaged in similar activities and made them profitable this success may show that the taxpayer has a profit objective even though the current activity is presently unprofitable sec_1_183-2 income_tax regs a taxpayer’s success in other unrelated activities also may indicate a profit objective see daugherty v commissioner tcmemo_1983_188 taxpayer’s diligence initiative foresight and other qualities that generally lead to success in other business activities indicate taxpayer had a profit_motive for activity at issue petitioners are both extremely successful individuals petitioners grew cfi the company they founded into an organization with over dollar_figure million in sales at its peak as majority owners of cfi petitioners were responsible for overseeing every aspect of the business including marketing design coordinating production employee relations and numerous other activities petitioners also have been engaged in several other businesses for example mr rabinowitz was involved in a movie business with ms harrah at the time of trial petitioners co-owned a women’s apparel design and import firm called studio cl the fact that petitioners grew cfi into such a large organization and have considerable experience in various business endeavors is evidence of petitioners’ ample business experience and skills they brought to their jet charter activity see id this factor favors finding petitioners operated the jet charter activity for profit the taxpayer’s history of income or loss with respect to the activity we next examine petitioners’ history of income or loss with respect to the jet charter activity a history of substantial losses may indicate that the taxpayer did not conduct the activity for profit 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs losses during the initial or startup stage of an activity do not necessarily indicate however that the taxpayer did not conduct the activity for profit but losses that continue to be sustained beyond the period that customarily is necessary to bring the operation to profitable status may indicate the taxpayer did not engage in the activity for profit engdahl v commissioner t c pincite sec_1_183-2 income_tax regs losses due to unforeseen circumstances beyond the taxpayer’s control do not negate that the taxpayer engaged in the activity for profit sec_1 b income_tax regs petitioners sustained losses from the jet charter activity each year from through petitioners’ losses during the early years of their operation could be attributed to a startup phase of the activity but the losses continued for years petitioners’ losses with respect to the jet charter activity generally decreased however almost every year during the relevant years further petitioners’ net_cash_flow with respect to the jet charter activity although negative for each of the relevant years showed a general trend of increasing mr rabinowitz also testified that the unforeseen safety problems with the falcon during the relevant years and the resulting negative publicity hampered bhj’s ability to obtain third-party charters for the jet and also required additional safety checks which increased bhj’s expenses thus although petitioners did sustain large losses during each of the relevant years and in fact through the duration of the activity the unforeseen circumstances were a factor in the losses petitioners encountered in the jet charter activity also several indications showed that the prospects of the jet charter activity were improving over time these circumstances partially mitigate petitioners’ long history of losses from the jet charter activity the amount of occasional profits if any which are earned we next consider the amount of occasional profits if any petitioners earned from the jet charter activity occasional profits the taxpayer earned from the activity in relation to the amount of losses_incurred the amount of the taxpayer’s investment and the value of the assets used in the activity provide useful criteria in determining the taxpayer’s intent sec_1_183-2 income_tax regs a practical possibility that a taxpayer could earn enough money in a year to exceed expenses also can indicate a profit objective 50_tc_1007 petitioners incurred losses from the jet charter activity for each year beginning with when they began the activity through when they ended the activity by selling the falcon as discussed above there was a general trend of increasing net_cash_flow and decreasing losses from the jet charter activity through the relevant years even with the unforeseen safety problems notwithstanding this trend it is uncertain whether petitioners ever would have earned a profit from the jet charter activity because of the significant fixed costs involved this factor does not support petitioners’ contention that they engaged in the jet charter activity for profit the financial status of the taxpayer we next examine petitioners’ financial status if a taxpayer does not have substantial income or capital from sources other than the activity in question it may indicate that the taxpayer engages in the activity for profit sec_1_183-2 income_tax regs conversely substantial income from sources other than the activity especially if the losses generate large tax benefits may indicate that the taxpayer is not conducting the activity for profit id taxpayers with substantial income from other sources have a much greater tax incentive to incur large expenditures in a hobby type of business 59_tc_312 the fact that a taxpayer has substantial income from other sources does not however foreclose a profit_motive if the facts and circumstances indicate a taxpayer engaged in the activity for profit wheeler v commissioner tcmemo_1999_56 it is just one factor see id petitioners had substantial income from cfi that the jet charter losses could and did offset petitioners reported considerable net_income during each of the relevant years in alone petitioners reported dollar_figure million in wages while this factor is not helpful to petitioners’ contention it does not foreclose a profit_motive see id whether elements of personal pleasure or recreation are involved we next examine whether elements of personal pleasure or recreation were involved in the activity the presence of recreational or pleasurable motives in conducting an activity may indicate that the taxpayer is not conducting the activity for profit sec_1_183-2 income_tax regs the fact that the taxpayer derives personal pleasure from engaging in the activity is not sufficient to cause the activity to be classified as not engaged in for profit however if the activity is in fact conducted for profit as shown by other factors jackson v commissioner supra sec_1_183-2 income_tax regs petitioners did make some personal trips in the falcon petitioners and respondent do not agree on the number and value of the trips petitioners took for personal travel versus business travel the disagreement results in part from different views of particular trips for example respondent characterized certain trips from san diego to los angeles made by jennifer heft petitioners’ daughter and a merchandising employee of cfi to meet with ms little as personal trips while petitioners characterized ms heft’s travel as business trips similarly respondent contended that petitioners’ trips to aspen colorado were of a personal nature because mr rabinowitz skied and petitioners had a second home there while petitioners stated that the aspen trips were to visit their flagship carole little store to deliver or collect merchandise check on merchandise or store appearance and discuss cfi matters with the store staff in any case petitioners paid bhj from their personal account for the occasional personal trips they took on the falcon and cfi paid for the trips characterized as having a business_purpose petitioners also often used ms harrah’s jet for personal travel when the falcon was on charter or otherwise unavailable to them cfi was the primary customer of the jet charter activity and petitioners both testified credibly as to the business_purpose and nature of the cfi trips we are not convinced that either petitioner was an airplane hobbyist or particularly enjoyed air travel but we do recognize that petitioners derived some benefit from the ability to use a private jet occasionally for personal purposes we find petitioners’ use of the falcon and the jet charter activity to be primarily motivated by the needs of their cfi business this factor supports a conclusion that petitioners engaged in the jet charter activity for profit conclusion mr rabinowitz testified that petitioners thought they could enter the jet charter business do it better than other charter companies and make money while doing it petitioners used their considerable business skills to attempt to make the business profitable petitioners set competitive rates for the jet charter activity advertised the jet charter activity and solicited business from other jet owners petitioners kept voluminous books_and_records and maintained the faa certificate required to sell charters to third parties petitioners made modifications to their business plan to attract more charter business petitioners successfully showed a general trend of decreasing losses throughout the relevant years despite negative publicity and faa-mandated additional safety requirements for their jet most importantly we found petitioners’ testimony reliable and credible the nine nonexclusive factors and the facts and circumstances of this case lead us to conclude that petitioners engaged in the jet charter activity with the primary predominant and principal purpose and intent of realizing an economic profit independent of tax savings during the relevant years we therefore find that petitioners have met their burden of proving the requisite motive for their jet charter activity accordingly we do not sustain respondent’s determination in the notice_of_deficiency to reflect the foregoing in favor of petitioners and the concessions of the parties decision will be entered under rule


t c summary opinion united_states tax_court john n shelton jr petitioner v commissioner of internal revenue respondent docket no 15341-99s filed date john n shelton jr pro_se chang ted li for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subseguent 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 -2 - respondent determined the following deficiencies and additions to tax with respect to petitioner’s federal income taxes additions to tax taxable_year deficiency sec_6651 a sec_6654 dollar_figure dollar_figure dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure dollar_figure after concessions which are discussed below the issues to be decided involve the correct amount of rental income for each taxable_year at issue and the amount of allowable expense deductions petitioner failed to file federal_income_tax returns and failed to make estimated_tax payments for the taxable years to inclusive as a result respondent prepared substitute returns for each of the taxable years in issue and in the notice_of_deficiency made the following adjustments taxable_year wage income received dollar_figure dollar_figure dollar_figure dollar_figure interest_income -- rental income big_number big_number big_number big_number respondent computed the above deficiencies allowing petitioner the standard_deduction and one exemption and using the tax table for married individuals filing separately the parties stipulated that petitioner received income during each of the taxable years as follows taxable_year wage income--u s dollar_figure dollar_figure dollar_figure dollar_figure postal service wage income---baltimore area dollar_figure dollar_figure dollar_figure dollar_figure local apwu interest income--u s dollar_figure dollar_figure dollar_figure -0- postal service_credit union petitioner stipulated that he failed to file federal_income_tax returns and failed to make estimated_tax payments for the taxable years to inclusive the court will treat the stipulations as concessions by the parties resolving the issues of unreported wage income and interest received for each of the taxable years at issue and the issues relating to the additions to taxes pursuant to sec_6651 and some of the facts have been stipulated and are so found the stipulation of facts supplemental stipulation of facts and the exhibits are incorporated herein by this reference at the time of the filing of the petition petitioner resided in finksburg maryland petitioner has been employed by the u s postal service in the main post office in baltimore for more than years including the taxable years in issue gross_income includes all income from whatever source derived sec_61 sec_61 specifically includes income derived from rents during the taxable years in issue petitioner owned residential_rental_property located pincite taney road baltimore maryland the property consists of a two-story shingle house with a driveway there is an apartment on each floor petitioner purchased the property in date and paid dollar_figure for the dwelling and land during the years at issue petitioner rented the first floor apartment to mr and mrs lewis reavis during and the reavises paid dollar_figure per month rent during and the reavises paid dollar_figure per month rent petitioner paid for all utilities the second floor apartment has been vacant for some time when both apartments were rented in petitioner received about dollar_figure in rent at trial the court received into evidence four schedules e supplemental income and loss one for each taxable_year in issue prepared by petitioner for purposes of trial reconstructing the rents received and expenses relating to the taney road property the schedules are summarized below taxable_year rental income dollar_figure dollar_figure s big_number dollar_figure expenses insurance mortgage interest big_number big_number big_number big_number repairs big_number big_number big_number supplies -o- big_number taxes big_number big_number big_number big_number utilities big_number big_number big_number big_number total expenses big_number big_number big_number big_number add depreciation big_number big_number big_number big_number total expenses big_number big_number big_number big_number losses from real_estate big_number big_number big_number big_number -5- petitioner’s uncontroverted testimony is credible and we find that he received rental income in and in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure respectively and not the dollar_figure amount for each year as determined in the notice_of_deficiency sec_212 allows as a deduction all ordinary and necessary expenses paid during the year for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income a taxpayer is required to maintain records sufficient to establish the amount of his income and deductions sec_6001 sec_1 6001-l1 a e income_tax regs at the conclusion of the trial the court held the record open for the receipt of evidence substantiating expenses relating to the rental property because petitioner failed to present any documentation at trial the parties filed a supplemental stipulation of facts in which they stipulated that petitioner paid the following amounts for mortgage interest taxable_year household bank fsb dollar_figure dollar_figure dollar_figure -o0- u s dept of hud dollar_figure dollar_figure --q- -o- total dollar_figure dollar_figure dollar_figure -o- based on the supplemental stipulation of facts petitioner is allowed deductions for mortgage interest in these amounts for the respective years based on the documentary_evidence attached as exhibits to - the supplemental stipulation of facts petitioner established that he paid real_property_taxes in and in the amounts of dollar_figure dollar_figure and dollar_figure respectively we hold that he is entitled to deductions in these amounts for those years further petitioner is entitled to deductions for of dollar_figure for water expenses and for of dollar_figure for repairs although we realize petitioner incurred many more expenses in connection with the operation of the rental property in the absence of any documentation we are unable to estimate additional expenses that would ordinarily be deductible unfortunately petitioner has not been helpful and therefore we cannot allow any additional deductions because we have no basis for determining how much was paid during the years in issue with respect to depreciation sec_167 and c allows a taxpayer to claim a depreciation deduction for property_held_for_the_production_of_income for which he established an adjusted_basis as provided in sec_1011 the phrase held_for_the_production_of_income has the same meaning in sec_212 and sec_167 47_tc_120 sec_168 b b provides that the straight_line method_of_depreciation is applicable to residential_rental_property and sec_168 provides for the applicable_recovery_period of years for such property further sec_168 d provides with respect to residential_rental_property that the - - applicable convention is the midmonth convention petitioner claimed a depreciation deduction of dollar_figure for the rental property for each year in issue computed as follows month and year recovery placed_in_service basis period convention method deduction dollar_figure years m m s l dollar_figure petitioner’s computations are correct and comport with the statute however petitioner used the purchase_price of dollar_figure as his basis for depreciation purposes which price includes both land and building the allowance for depreciation in the case of tangible_property does not apply to land sec_1_167_a_-2 income_tax regs petitioner is entitled to a depreciation deduction for each year upon the basis of the record we find the value of the land to be dollar_figure leaving petitioner with an adjusted_basis for depreciation of dollar_figure thus under sec_168 petitioner is entitled to a depreciation deduction of dollar_figure for each taxable_year in issue reviewed and adopted as the report of the small_tax_case division decision will be entered under rule


internal_revenue_service number release date index number ------------------------------------------------- ------------------------------------------------------------ -------------------------- ------------------------------------------------------------ -------- ------------------------------------------------- ------------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-130192-09 date date -------------------------------------------------------------------------------------------------- x ----------------------------------------------------------------------------------------------------------- ----------------------------------------- country date -------- -------------------------- dear -------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an entity classification election the information submitted states that x was formed under the laws of country x represents that x is a foreign_entity eligible to be treated as a partnership effective date however x failed to timely file a form_8832 entity classification election sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 provides guidance on the classification of a foreign_entity for federal_income_tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if the foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in plr-130192-09 sec_301_7701-3 sec_301_7701-3 provides that to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 with the designated service_center and that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a partnership effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-130192-09 in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives sincerely curt g wilson associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c summary opinion united_states tax_court betty l klebanoff petitioner v commissioner of internal revenue respondent docket no 9585-10s filed date william j curosh for petitioner chris j sheldon for respondent gerber judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure other court and this opinion shall not be treated as precedent for any other case respondent determined an dollar_figure deficiency in petitioner’s federal_income_tax and a dollar_figure accuracy-related_penalty under sec_6662 petitioner received dollar_figure in payments during which she did not report on her income_tax return she agrees that she received the dollar_figure but contends that it was a draw against future profits and not taxable in the alternative if the dollar_figure is considered taxable petitioner argues that she received it as an employee and that it is not subject_to self-employment_tax accordingly the questions we consider are whether the dollar_figure was a draw or a guaranteed_payment and if a guaranteed_payment whether it was subject_to self-employment_tax if the payment is taxable we must also consider whether petitioner is subject_to the accuracy-related_penalty background petitioner resided in arizona at the time her petition was filed mirus development mirus was an arizona limited_liability_company llc with rock solid ventures llc rock and the hospice house llc hospice as its only manager members during rock’s members were frederico buck and keith a colson rock group and hospice’s members hospice group were petitioner and christine a boehler ms boehler mirus was treated as a partnership for federal_income_tax purposes and reported on a calendar_year basis petitioner held a 25-percent interest in mirus through her 50-percent interest in hospice after filing her income_tax return petitioner received a schedule_k-1 partner’s share of income deductions credits etc from mirus that reflected a dollar_figure guaranteed_payment to petitioner petitioner received the dollar_figure from mirus during and admits that she did not report that amount on her income_tax return which was filed on or about date petitioner and ms boehler are registered nurses specializing in hospice care mr buck and mr colson were in the real_estate development business and were interested in developing and building hospice in-patient units petitioner and ms boehler met with messrs buck and colson and agreed to combine their expertise to develop run and sell hospice in- patient units they merged their expertise by forming the llcs hospice and rock petitioner and ms boehler were without capital or a source_of_income and initial discussions focused upon a flow of payments to hospice group during the developmental stages of the project an understanding was reached whereby petitioner and ms boehler would receive payments during development of the project and the amounts received would reduce their shares of any profit that resulted from the sale of the units as a result of the negotiations mirus was formed with hospice and rock as equal members and the four individuals with equal shares in mirus essentially as partners through their llcs petitioner and ms boehler were involved in the venture with messrs buck and colson and during petitioner and ms boehler each received dollar_figure pursuant to the understanding reached by the parties an operating_agreement for mirus was not finally executed by the parties under the drafts of an operating_agreement petitioner and ms boehler were to receive an advance on distributions against their share of future profits of mirus equal to seventeen thousand dollars dollar_figure the ‘monthly draw’ petitioner and ms boehler understood from the discussions and drafts of operating agreements that the payments received they split six dollar_figure monthly payments thereby receiving dollar_figure each during were draws against any future profits of mirus in the preliminary discussions and after mirus was operational the monthly amounts petitioner was receiving were referred to as draws petitioner did not receive a form div dividends and distributions or schedule_k-1 from mirus until after her return was due and filed at the time that petitioner was attempting to prepare her tax_return she tried to contact mirus and messrs buck and colson but received no response when it was time to file her tax_return petitioner decided to file the return without reporting the dollar_figure because of the confusion created by the lack of information from mirus and the understanding that an amended tax_return could be filed when the confusion was resolved petitioner’s federal_income_tax return was filed on or about date similarly ms boehler did not include her dollar_figure on her tax_return taking the position that it was a draw or advance against future profits from the project a form_1065 u s return of partnership income was filed by messrs buck and colson for mirus on or after date that partnership return reflected that petitioner was a 25-percent partner and that the dollar_figure payment she received was a guaranteed_payment subject_to self-employment_tax subsequently petitioner consulted with a tax professional and an amended partnership return was prepared for mirus showing hospice and rock as its partners rather than the four individuals at the time petitioner filed her tax_return the relationship with messrs buck and colson was strained and there was a lack of communication it was petitioner’s position that she was not a partner in mirus and that hospice was subsequently petitioner filed an amended form_1065 for mirus reflecting hospice as a partner instead of petitioner and ms boehler hospice group asked but was not permitted to see the detailed financial information for mirus at some point during things began to unravel in hospice group’s relationship with rock group rock group offered hospice group a reduced percentage of the enterprise percent coupled with the elimination of their monthly payments petitioner was unable to proceed without the monthly payments and she and ms boehler hired an attorney to represent their interests in the parting of ways or dissolution of the mirus enterprise by the end of the mirus venture was without substance and operations ceased in early hospice group’s attorney began negotiations with rock group and ultimately their relationship with hospice group was formally ended the mirus venture was not continued by messrs buck and colson and it ceased operations during discussion the parties’ controversy over the dollar_figure in payments petitioner received is focused upon the question of the nature of the payments petitioner contends that the payments were draws against her llc’s percentage of future sales of hospice care units respondent contends that the payments were guaranteed payments directly from mirus to petitioner the major differences between the two positions concern the type and amount of tax that would result generally payments received by a partner from a partnership that are determined without regard to the income of the partnership are classified as guaranteed payments under sec_707 and are taxable as ordinary_income under sec_61 payments received by a partner that are determined with regard to partnership income and or are in the nature of current or liquidating distributions may be taxable as capital_gain to the extent that they exceed a partner’s basis in the partnership see sec_731 additionally advances against distributive shares are treated as current distributions at the end of the year pursuant to sec_1_731-1 income_tax regs other differences are that payments made to a partner for services which are determined without regard to partnership income may be deductible by the partnership provided they otherwise satisfy the tests of sec_162 and that such payments may be subject_to social_security or self-employment_tax the record supports our holding that the dollar_figure in payments to petitioner was a draw against future earnings_of the partnerships petitioner and ms boehler brought their hospice care expertise to a business venture with two other individuals who were real_estate entrepreneurs the business venture was cast in an llc mirus and petitioner and ms boehler formed hospice a separate llc to be a 50-percent partner in mirus messrs buck and colson brought their real_estate expertise and capital to the venture their 50-percent interest in mirus was held through rock a separate llc negotiations resulted in an understanding that petitioner and ms boehler would receive advances against future distributions of profits the plan was to develop and sell five hospice care units and the partners would be entitled to their percentages of the profits through their llcs messrs buck and colson had bases in their partnership interests and petitioner and ms boehler did not it was therefore anticipated that the amounts petitioner received were against her share if any of the profits from the sale of hospice units the dollar_figure in payments was not paid from profits and it was not based on her performance of duties ultimately the venture did not succeed no income or profits materialized and mirus rock and hospice were for all practical purposes abandoned by the end of these circumstances resulted in petitioner’s receipt of payments totaling dollar_figure during which were intended as draws against future sales of hospice units but in effect resulted in liquidation of her partnership_interest sec_731 governs these circumstances under sec_731 in the case of the payment of a distribution by a partnership to a partner-- gain shall not be recognized to such partner except to the extent that any money distributed exceeds the adjusted_basis of such partner’s interest in the partnership immediately before the distribution because petitioner had no basis in her partnership_interest the dollar_figure is taxable as capital_gain to petitioner and is not subject_to self-employment_tax see sec_731 sec_1402 finally we consider whether petitioner is liable for a sec_6662 accuracy-related_penalty for negligence or disregard of rules or regulations and or a substantial_understatement_of_income_tax under sec_6662 and for a taxpayer may be liable for a 20-percent penalty on any underpayment_of_tax attributable to negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax sec_6662 and b and negligence is any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and disregard means any careless reckless or intentional disregard sec_6662 2ultimately it is irrelevant whether hospice and rock or petitioner and the other venturers were the partners of mirus the entire conglomeration of entities and the operation of the venture was without vitality or substance and ceased to operate as of the end of the parties during attempted to settle their interests but no further activity directed toward developing and selling hospice units occurred after because of our holding that the dollar_figure was a draw and resulted in capital_gain it is unnecessary to consider petitioner’s alternative argument an underpayment is not attributable to negligence or disregard to the extent that the taxpayer shows that the underpayment is due to reasonable_cause or good_faith 115_tc_43 affd 299_f3d_221 3d cir see also sec_1_6662-3 sec_1_6664-4 income_tax regs a substantial_understatement_of_income_tax is an understatement that exceeds the greater of percent of the tax required to be shown on the tax_return or dollar_figure sec_6662 petitioner was aware that she received dollar_figure in payments from mirus during she did not understand the legal or technical ramifications of those payments she made attempts to contact mirus and messrs buck and colson but she did not receive any response regarding the dollar_figure in payments petitioner did not receive any notification from mirus before her income_tax return was due and was filed at the time her income_tax return was due and being filed in petitioner’s lawyer was engaged in negotiations in an attempt to work out some settlement of her interest in mirus there was uncertainty about whether petitioner would receive additional_amounts from mirus and or messrs buck and colson and as to the nature of the payments already received petitioner decided to wait and file an amended_return for after she was able to better address the taxability of the dollar_figure in payments the events that culminated in the filing of the first mirus partnership return and petitioner’s income_tax return were followed in relatively short order by respondent’s audit of petitioner’s return and the issuance of a notice_of_deficiency petitioner consulted tax professionals who advised her and caused her to file an amended partnership return for mirus reflecting that the dollar_figure in payment was a draw and that hospice and rock were the partners of mirus it was therefore reasonable for petitioner to take the position that the dollar_figure was not taxable in her tax_year under those circumstances petitioner’s actions were reasonable and she is not liable for an accuracy-related_penalty to reflect the foregoing decision will be entered under rule