                        T.C. Memo. 2005-188



                      UNITED STATES TAX COURT



   LEONARD RABINOWITZ AND M. CAROLE RABINOWITZ, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5595-02.               Filed July 27, 2005.



     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

$257,242 for 1992, $774,708 for 1993, $1,409,667 for 1994 and

$150,837 for 1997 in petitioners’ Federal income taxes.1   The

parties have settled all issues except whether petitioners

operated their jet charter activity for profit from 1993 through

     1
      All 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.
                                  -2-

1997 (the relevant years).2   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

     2
      The “relevant years” in this case include 1995 and 1996,
which are not years for which respondent issued a notice of
deficiency. To determine the correct tax liability for 1992 and
1993, 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 1995 and 1996.
Sec. 6214(b) 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(b); Hill v. Commissioner, 95
T.C. 437, 439-440 (1990). Therefore, we consider whether
petitioners operated the jet charter activity for profit in 1995
and 1996 solely to permit the parties to compute the correct net
operating loss carrybacks for 1992 and 1993 pursuant to Rule 155.
See sec. 6214(b); Hill v. Commissioner, supra at 439-440.
Although respondent issued a notice of deficiency to petitioners
for 1992, 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 1992.
                                 -3-

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 2 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.3

Their personal and professional relationship would last over 30

years, dramatically change their lives, and alter the way in

which women’s apparel was designed and marketed.




     3
      Petitioners married each other in late 1978 or early 1979
and divorced in 1995 or 1996 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.
                                -4-

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 1974.4

     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


     4
      During the relevant years, CFI was an S corporation and
petitioners owned a majority of its stock.
                                 -5-

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 1984, CFI had grown to $24 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.
                                -6-

     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 1985.   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.
                                 -7-

     The impact on CFI was immediate.   By the early 1990s, CFI’s

sales had grown to a peak of over $300 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.5   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

     5
      Petitioners also had a second home in Aspen, Colorado.
                                -8-

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 $840,000 to $5.5 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.
                                -9-

     Petitioners explored the idea of purchasing a larger, longer

range aircraft that they could charter for a higher fee per hour.

In 1989, petitioners purchased a Dassault Falcon 200 jet (the

Falcon) for $5.2 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 6 to 8 months.   To maximize the charter business,

petitioners obtained an operating certificate for aircraft

chartered to the general public (a rule 135 certificate) pursuant

to the requirements of the Federal Aviation Administration (FAA).

Raleigh Enterprises assisted with the process of obtaining the

rule 135 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 135 certificate for their jet

because they wanted to make it available for third-party

charters.   See 14 C.F.R. secs. 119.33, 135.1-135.443 (2005).   The

FAA requires a rule 135 certificate for an enterprise to charter

an aircraft for profit.   An enterprise that cannot charter its
                                 -10-

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 91, and a scheduled airline

would obtain a certificate under FAA rule 121.

        The FAA requirements to maintain a rule 135 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 135 certificate.     The FAA also requires both

a maintenance manual and an operations manual to maintain a rule

135 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 135

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 135 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
                               -11-

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 $1,950 and $2,250 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 $1,800 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 1989, when

petitioners acquired the Falcon.   Mr. Rabinowitz himself spent

approximately 30 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
                                -12-

aircraft.    In addition, Mr. Rabinowitz also spent at least 50

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 1990 through 1995 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.
                              -13-

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 $1,200 per hour for the use of the Falcon

based on the direct costs of operation, and Ms. Harrah charged

petitioners approximately $1,300 to $1,400 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 $100 to $200 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
                                -14-

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 80

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.
                                 -15-

     Petitioners suffered a net loss for each year from 1985

through 1997 attributable to their jet charter activity.     During

the relevant years, BHJ had the following gross income, net loss

and net cash flow:

                                   Net Income
     Year     Gross Income           (Loss)      Net Cash Flow

     1993     $580,340            ($743,485)      ($547,984)

     1994         545,941          (685,719)       (485,423)

     1995         447,524          (775,618)       (574,585)

     1996         527,298          (521,076)       (397,924)

     1997         273,704          (214,126)       (208,938)

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 April 1997, petitioners decided to sell the Falcon for

$4.35 million and terminated their jet charter activity.

Petitioners also decided to sell CFI.   They ultimately sold it to

a larger company in August 2000 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
                                 -16-

activity.    Respondent disallowed petitioners’ losses relating to

the jet charter activity for 1993, 1994, and 1997 in a notice of

deficiency dated November 15, 2001, determining that, among other

issues, petitioners did not engage in their jet charter activity

for profit under section 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 section

183.    Section 183(a) 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 section

183(b)(1), and deductions that would be allowable only if the

activity is engaged in for profit shall be allowed under section

183(b)(2), but only to the extent that the gross income from the

activity exceeds the deductions allowable under section

183(b)(1).

       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.    Golsen v.
                               -17-

Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.

1971).   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

Wolf v. Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), affg. T.C.

Memo. 1991-212; Polakof v. Commissioner, 820 F.2d 321, 323 (9th

Cir. 1987), affg. T.C. Memo. 1985-197; Indep. Elec. Supply, Inc.

v. Commissioner, 781 F.2d 724, 726 (9th Cir. 1986), affg. Lahr v.

Commissioner, T.C. Memo. 1984-472.

     Petitioners do not contend that section 7491(a) applies in

this case to shift the burden of proof to respondent, nor have

they established they met the requirements of section

7491(a)(2).6   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 at 324; Indep.
Elec. Supply, Inc. v. Commissioner, supra at 727; Dreicer v.

Commissioner, 78 T.C. 642, 645 (1982), affd. without published

opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(b), Income

Tax Regs.   While a taxpayer’s expectation of profit need not be

     6
       Sec. 7491(a) shifts the burden of proof to the
Commissioner in some circumstances for cases involving
examinations that commenced after July 22, 1998. See Internal
Revenue Service Restructuring and Reform Act of 1998, Pub. L.
105-206, sec. 3001, 112 Stat. 726.
                                 -18-

reasonable, there must be a good faith objective of making a

profit.    Allen v. Commissioner, 72 T.C. 28, 33 (1979); sec.

1.183-2(a), Income Tax Regs.    We give greater weight to objective

facts than to a taxpayer’s statements of intent.     Dreicer v.

Commissioner, supra at 645; sec. 1.183-2(a), 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 Section 183

     Multiple activities of a taxpayer may be treated as one

activity if the activities are sufficiently interconnected.       Sec.

1.183-1(d)(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
                                 -19-

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 Keanini v. Commissioner, 94 T.C. 41, 46 (1990);

Estate of Brockenbrough v. Commissioner, T.C. Memo. 1998-454.

     We find that it is inappropriate to treat CFI and BHJ as one

activity for purposes of applying section 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.
                                 -20-

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 section

183 rules.   See Schlafer v. Commissioner, T.C. Memo. 1990-66;

sec. 1.183-1(d)(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(d)(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(b), Income Tax Regs.

The nine factors are:   (1) The manner in which the taxpayer

carries on the activity; (2) the expertise of the taxpayer or his

or her advisers; (3) the time and effort expended by the taxpayer

in carrying on the activity; (4) the expectation that the assets

used in the activity may appreciate in value; (5) the success of

the taxpayer in carrying on other similar or dissimilar

activities; (6) the taxpayer’s history of income or loss with

respect to the activity; (7) the amount of occasional profits, if

any, which are earned; (8) the financial status of the taxpayer;
                                 -21-

and (9) 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.     Hendricks v.

Commissioner, 32 F.3d 94, 98 (4th Cir. 1994), affg. T.C. Memo.

1993-396; Brannen v. Commissioner, 722 F.2d 695, 704 (11th Cir.

1984), affg. 78 T.C. 471 (1982); sec. 1.183-2(b), Income Tax

Regs.     The individual facts and circumstances of each case are

the primary test.     Keanini v. Commissioner, supra; Allen v.

Commissioner, supra at 34; sec. 1.183-2(b), 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 Factors
     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(b)(1), Income Tax Regs.    In
                                 -22-

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.     Engdahl v. Commissioner, 72 T.C.

659, 666-667 (1979); sec. 1.183-2(b)(1), Income Tax Regs.

     Petitioners carried on the jet charter activity in a

businesslike manner during the relevant years.    Petitioners

sought and obtained a rule 135 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 135 certificate.    The FAA

did not impose these requirements on enterprises not maintaining

a rule 135 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.
                                -23-

     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.
                                 -24-

        The rule 135 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.

        2.   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(b)(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 6 to 8 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.
                               -25-

     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.

     3.   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(b)(3),

Income Tax Regs.   The fact that a taxpayer devotes a limited

amount of time to an activity does not necessarily indicate a
                                -26-

lack of profit motive where the taxpayer employs competent and

qualified persons to carry on the activity.    Id.

     Mr. Rabinowitz spent approximately 30 hours per week on the

jet charter activity during the relevant years.      This time was in

addition to the approximately 50 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.
                               -27-

     4.   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.    Bessenyey v.

Commissioner, 45 T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d

Cir. 1967); sec. 1.183-2(b)(4), 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.

     5.   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
                               -28-

unprofitable.   Sec. 1.183-2(b)(5), Income Tax Regs.   A taxpayer’s

success in other, unrelated activities also may indicate a profit

objective.   See Daugherty v. Commissioner, T.C. Memo. 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 $300 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.

     6.    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
                               -29-

activity for profit.   Golanty v. Commissioner, 72 T.C. 411, 427

(1979), affd. without published opinion 647 F.2d 170 (9th Cir.

1981); sec. 1.183-2(b)(6), 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, 72 T.C. at 668;

sec. 1.183-2(b)(6), 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. 1.183-

2(b)(6), Income Tax Regs.

     Petitioners sustained losses from the jet charter activity

each year from 1985 through 1997.     Petitioners’ losses during the

early years of their operation could be attributed to a startup

phase of the activity, but the losses continued for 12 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
                              -30-

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.

     7.   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(b)(7), 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.   Bolt v.
Commissioner, 50 T.C. 1007, 1014 (1968).

     Petitioners incurred losses from the jet charter activity

for each year beginning with 1985, when they began the activity,

through 1997, 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
                                  -31-

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.

      8.    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(b)(8),

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.        Jackson v.

Commissioner, 59 T.C. 312, 317 (1972).        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, T.C. Memo. 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
                                 -32-

considerable net income during each of the relevant years.      In

1993 alone, petitioners reported $5.5 million in wages.     While

this factor is not helpful to petitioners’ contention, it does

not foreclose a profit motive.    See id.

     9.    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(b)(9), 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(b)(9), 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
                               -33-

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.

     10.   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
                                -34-

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 155.
