                          T.C. Memo. 2004-4



                       UNITED STATES TAX COURT



     CSABA L. MAGASSY AND FRANCES H. MAGASSY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11982-01.             Filed January 5, 2004.



     Glen A. Stankee, for petitioners.

     W. Robert Abramitis, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:    Respondent determined deficiencies in

petitioners’ Federal income taxes as follows:


               Year                  Deficiency

               1995                   $245,790
               1996                    364,462
               1997                    989,450
                                 - 2 -

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue.

     The primary issue for decision is whether, during the years

in issue, petitioner Csaba L. Magassy and an S corporation, in

which Csaba L. Magassy was the sole shareholder and director,

were involved in the restoration, charter, and sale of a Feadship

yacht with a profit objective.


                        FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     Petitioners are husband and wife and resided in Potomac,

Maryland, at the time the petition was filed.1   Petitioners have

three children -- two sons and a daughter.

     Petitioner has a successful medical practice in the

Washington, D.C. metropolitan area with a specialty in plastic

surgery.

     On March 1, 1990, Bill Norman (Norman), petitioner’s

brother-in-law, suggested that petitioner purchase a particular

108’ Feadship yacht, which was then located in Florida and which

was being offered for sale through Lee Mogul (Mogul), the father

of Mark Mogul, one of Norman’s employees.    Mogul owned a yacht

brokerage business, Boats, Yachts & Ships, Inc., which was

located in Ft. Lauderdale, Florida.


1
     Hereinafter, references to petitioner in the singular are to
Csaba L. Magassy.
                                - 3 -

     Feadship yachts are built in the Netherlands by a consortium

of Dutch shipbuilders and are generally recognized as at the top

of the luxury superyacht market.    Feadship stands for “First

Export Association of Dutch Shipbuilders”.    Feadship yachts are

built and sold under the advertising slogan “Feadship design and

build the most perfect luxury yachts in the World.”

     It was represented to petitioner that the particular

Feadship brought to his attention was owned by Boats, Yachts &

Ships and that it had been custom built in approximately 1963 for

Henry Ford II.   Also, it was represented to petitioner that the

Feadship was being offered for sale under distress conditions and

that the Feadship could be restored and resold at a substantial

profit.

     Petitioner was provided a written copy of a marine survey of

the Feadship in which it was represented that the fair market

value of the Feadship was $2.4 million and that the replacement

cost to purchase a brand new Feadship of the same size would be

more than $9 million.    The survey provided to petitioner,

however, was incomplete because the Feadship had not been pulled

out of the water for inspection of the steel hull for corrosion

and rust.   As a result, petitioner was not aware of the actual

condition of the hull.    Further, the survey did not include an

estimate of the restoration costs for the Feadship, and
                              - 4 -

petitioner did not independently investigate what those

restoration costs might be.

     Neither petitioner, any members of petitioners’ family, nor

Norman had any experience buying, owning, selling, operating, or

chartering yachts.

     On March 1, 1990, without going to Florida to see and

inspect the Feadship, petitioner signed a written contract to

purchase the Feadship for $1.625 million.    On the next day,

petitioner signed an addendum to the purchase contract restating

his purchase price for the Feadship to be $1.3 million.    At the

time petitioner signed the purchase contract, he made a cash

downpayment of $100,000 to Boats, Yachts & Ships.    Petitioner was

to pay the balance of the purchase price at closing.

     In the above written contract, the stated owner and seller

of the Feadship was Boats, Yachts & Ships, Mogul’s yacht

brokerage firm located in Florida.    On March 1, 1990, however,

Boats, Yachts & Ships did not actually own the Feadship.    Rather,

Boats, Yachts & Ships apparently purchased the yacht on May 30,

1990, for a stated purchase price of $1 million, pursuant to a

contract entered into on or about March 28, 1990, with the former

owner of the Feadship.

     The former owner of the Feadship also paid Boats, Yachts &

Ships a “commission” of $245,620.50, apparently in connection

with the sale of the Feadship to petitioner.
                               - 5 -

     In the March 2, 1990, addendum to the written purchase

contract between petitioner and Boats, Yachts & Ships, it was

stated that approximately $300,000 of the proceeds to be received

from petitioner on his purchase of the Feadship would be used by

Boats, Yachts & Ships to pay for a “complete refurbishment” of

the Feadship.

     Although Mark Mogul and Norman were not required to share in

either the subsequent costs of restoration or maintenance of the

Feadship, in the written contract dated March 1, 1990, petitioner

agreed to share with Mark Mogul and with Norman all of the

profits realized on a subsequent sale of the Feadship by

petitioner.   Under this contract, on a subsequent sale of the

Feadship, petitioner was to retain 75 percent of any profits, and

Mark Mogul and Norman were to divide equally 25 percent of any

profits.

     At the time of his purchase of the Feadship in March of

1990, petitioner had no written business plan for the restoration

and resale of the Feadship, and, at trial, petitioner had no

recollection as to how the above percentage split of any profits

that might be realized on a resale was agreed to.

     On May 9, 1990, a second marine survey of the Feadship was

prepared.   Therein, it was stated that the fair market value of

the Feadship was $1.85 million, that if the Feadship was restored
                                - 6 -

to “Bristol” condition2 the fair market value of the Feadship

would increase to $3.2 million, and that replacement of the

Feadship purchased by petitioner with a brand new Feadship of the

same size would cost petitioner $8.7 million.    Like the first

survey, however, this second survey was incomplete in that the

Feadship was not removed from the water and the hull was not

inspected.    Also, the second survey did not reflect an estimate

of the restoration costs of the Feadship to Bristol condition.

     As of the May 29, 1990, closing of petitioner’s purchase of

the Feadship, petitioner still had neither inspected nor seen the

Feadship.    Also, petitioner was not present at the closing.

     To assist with his purchase of the Feadship, petitioner

obtained a secured bank loan for $1 million.    Petitioner paid the

proceeds of this loan toward the purchase price of the Feadship.

     For a number of months after petitioner’s purchase, the

Feadship remained in Florida in the control of Mogul at the

facilities of Boats, Yachts & Ships.

     In July of 1990, petitioner was in Florida and saw the

Feadship for the first time and realized that the interior and

exterior of the Feadship were in extremely poor condition.

Despite being aware of the condition of the Feadship, petitioner


2
     Bristol condition refers to a yacht as being in very good
condition, with the varnish, paint, engines, and general
condition in a condition as good as or better than that of a
first-class hotel.
                               - 7 -

obtained a loan for $300,000 and paid $200,000 thereof to Boats,

Yachts & Ships.   The record is not clear as to the exact purpose

for this $200,000 payment, but presumably it was the final

payment due on petitioner’s purchase of the Feadship.

     In November of 1990, petitioner again saw the Feadship in

Florida.   At that time, petitioner was advised that the full

$300,000 designated for restoration of the Feadship had been

spent even though little progress had been made on the Feadship’s

restoration.3

     Petitioner then sought advice about the Feadship from John

Weller (Weller), a friend of his brother-in-law, Norman.   Weller

put petitioner in contact with one of his friends who owned Angus

Yachts (Angus), a shipyard in Alabama.   In January of 1991,

petitioner paid to have the Feadship moved to Angus’s Alabama

shipyard for further restoration work.   Representatives of Angus

estimated that the total cost to restore the Feadship would be

$218,000, but petitioner established no budget or limit for the

restoration work to be performed by Angus on the Feadship.

     After Angus had worked on the Feadship for several months,

petitioner hired an individual referred to as Captain Anthony


3
     On July 26, 1991, petitioner filed a lawsuit against Mogul,
Mark Mogul, and Boats, Yachts & Ships, seeking to recover the
$300,000 that was to pay for restoration of the Feadship.
Petitioner, however, never effected service on the above named
defendants in the lawsuit, and on Oct. 11, 1991, Boats, Yachts &
Ships was administratively dissolved as a corporation by the
Florida secretary of state.
                              - 8 -

Coby (Captain Coby), who was recommended to him by Weller, to

oversee the restoration work being done on the Feadship.    In July

of 1991, and for the first time during petitioner’s ownership of

the Feadship, the Feadship was removed from the water for

inspection of the steel hull, as a result of which extensive rust

on and corrosion to the hull of the Feadship were observed.

Thereafter, Captain Coby mailed periodic letters to petitioner,

reporting on the continuing problems with Angus’s work on the

Feadship.

     As of November 21, 1991, petitioner had paid Angus $428,647,

and Angus had billed petitioner an additional $527,637 for

restoration work on the Feadship.

     In November of 1991, Captain Coby advised petitioner that

the restoration work being performed by Angus on the Feadship had

become a “gravy train” for Angus.   At that time, petitioner

refused to pay Angus the above $527,637 in additional charges

relating to work that had been done on the Feadship during August

through November of 1991.

     On December 6, 1991, Angus filed suit against petitioner,

seeking to enforce a maritime lien against the Feadship relating

to Angus’s outstanding charges to petitioner.

     In the spring of 1992, petitioner obtained tax advice from a

Washington, D.C. law firm relating to the Feadship.   At that

time, petitioner’s costs relating to his purchase and to the
                               - 9 -

restoration of the Feadship totaled approximately $2 million.       A

memorandum petitioner received from the law firm noted that

petitioner’s cumulative costs in purchasing and restoring the

Feadship exceeded the Feadship’s fair market value and that yet

additional significant costs would be necessary to complete the

restoration of the Feadship.   Petitioner was advised that a sale

of the Feadship before completion of the restoration work and

without establishing a yacht chartering operation for the

Feadship would preclude treatment by petitioner of any loss on

the sale of the Feadship as an ordinary loss under section 1231.

     In November of 1992, petitioners and Angus settled the

above-referenced lawsuit pursuant to which petitioner agreed to

pay Angus an additional $480,000 -- $300,000 in cash and a

$180,000 promissory note with principal and interest due in

3 years.   Petitioner paid Angus the $300,000, and Angus released

the maritime lien on the Feadship.     With petitioner’s consent,

Captain Coby then transported the Feadship to a shipyard in Bayou

La Batre, Alabama.

     At the shipyard in Bayou La Batre, much of the prior

restoration work that had been done by Angus on the Feadship, at

a cost to petitioner of approximately $1 million, was determined

to be in need of being redone either because the work was

defective or for other reasons.   From late 1992 until June of
                                - 10 -

1994, petitioner incurred additional costs of approximately

$450,000 relating to continuing work on the Feadship.

     With petitioner’s consent, in June of 1994, Captain Coby

transported the Feadship to the Merrill Stevens Boat Yard in

Miami, Florida, where Captain Coby continued to supervise

restoration work on the Feadship for which petitioner paid at

least an additional $456,000.

     On December 7, 1994, petitioner organized S.M.S.M., Inc.

(SMSM), as a Florida corporation for the stated purpose of

chartering the Feadship.   SMSM made a timely S corporation

election, and at all relevant times, petitioner was the sole

shareholder and director of SMSM.

     On December 14, 1994, petitioner entered into an agreement

with Richard Bertram Yachts to list the Feadship for sale.    The

listing agreement stated an asking price for the Feadship of $2.4

million.   This asking price was significantly less than

petitioner’s cumulative costs of approximately $3.5 million

relating to his purchase and restoration work on the Feadship.

     On December 24, 1994, the Feadship was moved to another

shipyard in Florida for yet further restoration work.   At this

time, Mrs. Magassy became involved, incurring additional costs of

approximately $222,000 primarily in decorating the interior of

the Feadship.
                               - 11 -

     On January 27, 1995, SMSM signed a charter agreement with

Priscilla Yacht Management under which the Feadship became a part

of Priscilla Yacht Management’s charter fleet operation.     On

February 10, 1995, petitioner registered SMSM with the Florida

Department of Revenue as a sales and charter boat dealer.

     On March 8, 1995, petitioner transferred title to the

Feadship to SMSM.   Checking and credit card accounts were

established in the name of SMSM, and SMSM borrowed $874,000 to

refinance and to pay off the remaining balance on the $1 million

loan that petitioner had obtained to purchase the Feadship.

     None of the members of the Magassy family were qualified

yachtsmen.   From approximately March 16 through March 18, 1995,

however, Mrs. Magassy and petitioners’ three children were aboard

the Feadship during the Feadship’s first sea trial from

Ft. Lauderdale, Florida, to Port Lucaya, Bahamas.   From March 24

through March 27, 1995, petitioners and their sons were aboard

the Feadship during a sea trial of the Feadship from

Ft. Lauderdale to Hurricane Hole, Bahamas.   On at least three

additional occasions, different Magassy family members took

personal vacations on board the Feadship while it was in the

Bahamas.

     On a number of occasions during 1995, 1996, and 1997,

petitioners held dinner cruises and cocktail parties on the

Feadship.    Also, on occasion, without staying overnight, Magassy
                                     - 12 -

family members spent daytime and evening hours partying on the

Feadship.

       From 1995 through 1997, while still listed for sale, the

Feadship was chartered to a number of paying customers and

received charter fees as follows:

       Date of Charter                   Customer              Charter Fees

1995
           Apr. 11-20,    1995       Dr. P. George             $ 18,000
             June 2-6,    1995       PSA*                        20,000
            July 3-12,    1995       P. Racancello               21,215
              July 26,    1995       NECTA                        3,252
           Aug. 11-14,    1995       A. Milchan                   9,000
           Aug. 15-19,    1995       D. Pietro                   11,000
           Aug. 25-27,    1995       D. Pietro                    5,500
            Sept. 1-3,    1995       Great Northern
                                       Recyclers                    7,500
             Sept. 4-8,   1995       A. Milchan                    12,000
       Oct. 22-Dec. 25,   1995       PSA                           20,000
               Nov. 13,   1995       Rose Photo, Inc.               3,300
        Nov. 27-Dec. 5,   1995       Blood & Wine
                                       Productions               20,000
                                     1995 Total Charter Fees   $150,767
1996
         Mar. 20-Apr.     1996       Pratt/Manson                33,000
           Apr. 8-13,     1996       N. Halliday                 14,167
          Apr. 20-28,     1996       J. Meyer                    19,429
            July 1-5,     1996       A. Milchan                  16,667
          July 23-29,     1996       J. Pomerantz                12,600
      July 31-Aug. 7,     1996       Cunningham & Co.            18,900
          Aug. 17-26,     1996       Kaleen Charters             21,000
Dec. 26, 1996-Jan. 4,     1997       P. Biersdorfer              20,000
                                     1996 Total Charter Fees   $155,763
1997
            Apr. 9-13, 1997          Fugger                    $   4,000
                                     1997 Total Charter Fees   $   4,000

             *   Plastic Surgery Associates is petitioner’s
                 medical practice.


       As indicated, two of the above paid charters involved

Plastic Surgery Associates (PSA), petitioner’s medical group.

Participants in the charters of the Feadship by PSA included

partners and staff of petitioner’s plastic surgery practice.
                              - 13 -

During both charters involving PSA, petitioner and Mrs. Magassy

were on board the Feadship, and during one of those charters,

petitioners’ two sons were on board.

     For the 1996 charter boat season, petitioner’s Feadship was

not listed in the Charter Databank International Listings, an

important multiple listing service for a successful charter boat

operation.

     From the time of purchase in 1990 and through 1995, the

first year of chartering the Feadship, petitioner kept invoices

and copies of checks relating to payment of the restoration costs

of the Feadship.   During this period, however, petitioner’s books

and records relating to the Feadship were not complete.

     Between 1990 and 1994, petitioner incurred more than

$334,000 in interest expenses relating to the $1 million and the

$300,000 loans petitioner obtained to purchase the Feadship.

     Before 1996, incomplete books and records were maintained

relating to petitioner’s and SMSM’s costs and expenses for the

restoration work on the Feadship and for the charter of the

Feadship.

     In 1996, Midge McKee Hopkins (Hopkins), the longtime

bookkeeper for PSA, began maintaining computerized books and

records relating to the Feadship and to write the checks to pay

the bills relating to the Feadship.    Each month, Hopkins received

an envelope of bills, bank registers, and bank statements from
                             - 14 -

Mrs. Magassy relating to the Feadship.   Hopkins did not attempt

to verify the business purpose of any of the bills she paid

relating to the Feadship.

     During 1995, 1996, and 1997, when Mrs. Magassy visited the

Feadship in Florida, she would charge her airline ticket, her

hotel and car rental expenses, and her restaurant meals on her

personal credit card, and the expenses were treated by SMSM as

business expenses.

     On April 29, 1997, SMSM sold the Feadship to Classic Yachts

Restoration, Ltd., for $1.1 million.

     The charter income and claimed ordinary business expenses

and losses of SMSM (as an S corporation) (including the 1997 loss

on the sale of the Feadship) relating to the Feadship that were

reflected on SMSM’s Federal income tax returns for 1995, 1996,

and 1997, and that were passed through to petitioners’ joint

Federal income tax returns for each year, are reflected below:
                             - 15 -

                             1995             1996              1997

Charter Income
Gross receipts             $156,443      $   135,572    $      14,262
Other income                                                    4,023
          Total income     $156,443      $   135,572       $   18,285

Expenses
Salaries                   $ 68,285      $   129,924    $       37,914
Repairs                       1,211           68,111             6,153
Rents                        25,212           32,702             4,013
Taxes and licenses                                               9,919
Interest                     40,153           63,666            21,931
Depreciation                466,961          837,314           331,977
Advertising                  13,749           13,061
Other deductions
   Travel, meals,
     and entertainment        1,519            6,359            1,752
   Administrative             2,042            6,010            2,041
   Auto                         146                               595
   Fuel                                       10,687            1,733
   Bank charges                 865              283              112
   Dues & licenses              635            3,493
   Insurance                 25,506           27,464
   Management fees            8,561            9,515            3,050
   Outside services          14,823
   Professional fees         12,794           11,414           41,142
   Supplies                  39,437           22,773            4,541
   Telephone                 13,982            7,234            1,657
   Miscellaneous             17,359            2,285
   Uniforms                   5,808            5,520
   Office supplies                               539               498
   Payroll taxes                              14,595             3,935

          Total expenses   $759,048      $1,272,949    $       472,963

Claimed operating losses   $602,605      $1,137,377    $       454,678

Claimed ordinary loss on
    sale of the Feadship                               $1,931,292


     On petitioners’ joint Federal income tax returns for 1995,

1996, and 1997, the above claimed losses relating to the Feadship

were offset against petitioner’s taxable income from his medical
                              - 16 -

practice.   As a result, if the claimed expenses relating to the

Feadship are allowed in full, petitioner’s losses relating to the

Feadship will result in Federal income tax savings to petitioner

of $245,790 for 1995, $364,462 for 1996, and $989,450 for 1997.

     On audit for each of the years in issue, respondent

disallowed the claimed expenses and losses relating to

petitioner’s restoration, charter, and sale of the Feadship.


                              OPINION

     Generally, expenses attributable to an activity not engaged

in for profit are not allowable as ordinary and necessary

business expense deductions except to the extent of income from

the activity.   Sec. 183(a) and (b).    An “activity not engaged in

for profit” is defined in section 183(c) as “any activity other

than one with respect to which deductions are allowable * * *

under section 162 or under paragraph (1) or (2) of section 212.”

     For the expenses to be deductible under sections 162 and

212, so that the limitation of section 183 will not apply, a

taxpayer must engage in or carry on an activity to which the

expenses relate with an actual and honest objective of making a

profit.   Keanini v. Commissioner, 94 T.C. 41, 45 (1990) (citing

Golanty v. Commissioner, 72 T.C. 411, 425 (1979), affd. without

published opinion 647 F.2d 170 (9th Cir. 1981)); Dreicer v.

Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 702

F.2d 1205 (D.C. Cir. 1983).   Petitioners bear the burden of
                              - 17 -

proving that petitioner and SMSM engaged in the activity in

question with an actual and honest objective of realizing a

profit.   Hendricks v. Commissioner, 32 F.3d 94, 98 (4th Cir.

1994), affg. T.C. Memo. 1993-396.   The parties do not cite

section 7491, and no claim is made herein that the burden of

proof should be shifted to respondent.

     Although the section 183 analysis with respect to the

activities of an S corporation is applied at the corporate level,

a taxpayer’s objective or intent is attributable to his wholly

owned S corporation.   Ballard v. Commissioner, T.C. Memo. 1996-

68; sec. 1.183-1(f), Income Tax Regs.

     A profit objective in an earlier year does not give a

taxpayer a blank check with regard to losses incurred in later

years (i.e., in a later year an activity may be treated as an

activity not engaged in for profit even though in an earlier year

the activity may have been conducted by the taxpayer with a

profit objective).   See dicta in Dennis v. Commissioner, T.C.

Memo. 1984-4; Daugherty v. Commissioner, T.C. Memo. 1983-188.

     To determine whether a taxpayer had the requisite profit

objective, we consider all of the surrounding facts and

circumstances.   Keanini v. Commissioner, supra at 46 (citing

Lemmen v. Commissioner, 77 T.C. 1326, 1340 (1981)); Golanty v.

Commissioner, supra at 426; sec. 1.183-2(a) and (b), Income Tax

Regs.
                              - 18 -

     The regulations list several factors to consider in

analyzing whether a profit objective exists, none of which

generally is alone determinative.    Antonides v. Commissioner, 91

T.C. 686, 694 (1988), affd. 893 F.2d 656 (4th Cir. 1990).    Some

factors may be given more weight than others because they may be

more meaningfully applied to the evidence in a particular case.

Hendricks v. Commissioner, supra at 98; sec. 1.183-2(b), Income

Tax Regs.

     On the sale of property, under section 1231 a taxpayer may

treat a net loss on the sale as an ordinary loss only if the loss

involved a sale of property that was used in the taxpayer’s trade

or business.   Sec. 1231(a)(2) and (3) and (b).   In analyzing

whether an activity in connection with which property is sold

constituted a trade or business (for purposes of ordinary loss

treatment under section 1231), a taxpayer’s profit objective, or

lack thereof, relating to the activity is particularly

significant.   Helvering v. Highland, 124 F.2d 556, 561 (4th Cir.

1942) (involving a claim of business expense deductions under

section 23(a), the predecessor of section 162(a)); Abbene v.

Commissioner, T.C. Memo. 1998-330.     Also relevant are factors

relating to the manner, continuity, and regularity with which an

activity is conducted.   Commissioner v. Groetzinger, 480 U.S. 23,

35 (1987); De Amodio v. Commissioner, 34 T.C. 894, 906 (1960),

affd. 299 F.2d 623 (3d Cir. 1962).
                              - 19 -

     Petitioners assert that for 1995, 1996, and 1997, petitioner

and SMSM had an actual profit objective relating to ownership and

charter of the Feadship.   Petitioners assert that petitioner’s

and SMSM’s profit objective involved a continuation of the plan

petitioner adopted in 1990 when petitioner first purchased and

started restoration work on the Feadship and that that profit

objective expanded in 1995, 1996, and 1997 to include the charter

of the Feadship while the Feadship was offered for sale.

     Respondent does not dispute that in 1990, when petitioner

purchased the Feadship, petitioner may have had a vague plan and

objective of making some repairs and then, within a short period

of time, of reselling the Feadship for profit.   Respondent

argues, however, that over the course of the early 1990s,

petitioner’s costs of restoring the Feadship became so exorbitant

that by 1995 it had become clear to petitioner, and to anyone

else associated with the Feadship, that a profit would not be

realized either on the charter or on the sale of the Feadship.

Respondent therefore argues that the claimed 1995, 1996, and 1997

expenses and losses relating to restoration, charter, and sale of

the Feadship should not be allowed.

     We resolve the issues presented largely by applying the

factors set forth in the regulations under section 183.
                                - 20 -


Manner of Carrying On the Activity

     A profit objective is suggested where a taxpayer carries on

an activity in a businesslike manner and where accurate and

complete books and records are maintained relating to the

activity.   Sec. 1.183-2(b)(1), Income Tax Regs.   A profit

objective may be suggested for an activity where the activity is

conducted in a manner similar to other activities of the taxpayer

which are profitable.   Id.

     As discussed above, petitioner had no experience in owning a

yacht, no written business plan, and no budget for the

restoration costs, and petitioner made no good faith, reasonable

investigation before making his investment in the Feadship.

Incomplete books and records relating to the 1995 charter of the

Feadship were maintained.     Petitioner incurred substantial costs

in connection with the effort to restore the Feadship without

properly monitoring the work.


Expertise of Petitioners or Their Advisers

     A profit objective may be indicated by a taxpayer’s

expertise in, research on, and study of an activity, as well as

by a taxpayer’s consultation with experts.    Sec. 1.183-2(b)(2),

Income Tax Regs.   However, a taxpayer’s reliance on the advice of

someone who the taxpayer knew, or should have known, had a

conflict of interest may not be reasonable.     Addington v.

Commissioner, 205 F.3d 54, 59 (2d Cir. 2000), affg. T.C. Memo.

1997-259; Vojticek v. Commissioner, T.C. Memo. 1995-444 (such
                               - 21 -

advice may constitute nothing more than sales promotion).     A

taxpayer generally should undertake a good faith investigation of

the factors that would affect profit.    Westbrook v. Commissioner,

T.C. Memo. 1993-634, affd. per curiam 68 F.3d 868 (5th Cir.

1995).

     Petitioner had no expertise in purchasing yachts for resale,

in owning yachts, in restoring yachts, or in chartering yachts.

     Over the years, petitioner appears to have had access to

business, financial, and tax advisers.    The evidence, however, is

clear that petitioner did not seek independent expert advice

relating to the purchase of the Feadship.    Moreover, petitioner

did not investigate the cost of restoring the Feadship and did

not seek independent advice regarding the viability of the plan

suggested by Mogul at the time of purchase of the Feadship in

1990, and yet petitioner spent over $3.5 million on the Feadship.


Financial Status of Petitioner

     Where a taxpayer has substantial income from sources other

than the activity in question and where the losses from the

activity, if allowed, would generate substantial tax benefits, an

objective other than a profit objective is suggested.     Hendricks

v. Commissioner, 32 F.3d at 99; sec. 1.183-2(b)(8), Income Tax

Regs.    The limitations in section 183 are designed to prevent

taxpayers from offsetting unrelated income with losses from an

activity not carried on for profit.     Faulconer v. Commissioner,
                                - 22 -

748 F.2d 890, 893 (4th Cir. 1984), revg. and remanding T.C. Memo.

1983-165.

     The losses petitioner claimed relating to the Feadship

generated significant claimed tax savings, which, if allowed,

would offset income from petitioner’s unrelated medical practice.


History of Income or Losses

     Substantial losses over a number of years suggest a lack of

profit objective.   Sec. 1.183-2(b)(6), Income Tax Regs.   If,

however, losses result because of unforeseen circumstances beyond

the control of a taxpayer, the losses may bear less on the

question of profit objective.    Id.

     Chartering the Feadship resulted in losses to petitioner for

all 3 years at issue.   The excessive costs relating to the repair

and restoration work on the Feadship may have been a surprise to

petitioner, but good faith, diligent, and timely investigation

into the condition of the Feadship and into the nature of the

luxury yacht charter business would have eliminated most of this

surprise and would have provided to petitioner information upon

which he would have been able to make a reasoned and calculated

decision about whether to proceed further.

     By 1995, petitioner’s costs associated with the Feadship

were so high that he should have known that charter of the

Feadship would not generate income sufficient to cover those

costs.   Further, in 1995, 1996, and 1997, while the Feadship was

available for charter, the Feadship also was for sale at an
                              - 23 -

asking price of only $2.4 million, an amount well below the $3.5

million petitioner had already invested in the Feadship.


Opportunity for Profits From the Activity

     The opportunity to earn substantial profits in a speculative

venture may indicate that an activity is engaged in for profit

even though losses or only occasional small profits actually

result.   Sec. 1.183-2(b)(7), Income Tax Regs.

     Regardless of any profit objective petitioner initially in

1990 may have had when he purchased the Feadship, the $3.5

million that petitioner incurred in costs by 1995 far exceeded

the $2.4 million asking price for the Feadship (indicating an

expected loss on the sale), and petitioner had no reasonable

basis for expecting a profit from SMSM’s charter of the Feadship,

which petitioner at trial acknowledged was conducted for the

purpose of offsetting costs of maintaining the Feadship while it

was listed for sale.


Expectation That Assets May Appreciate

     An expectation that assets used in an activity may

appreciate in value may indicate a profit objective.   Golanty v.

Commissioner, 72 T.C. at 427-428; Bessenyey v. Commissioner, 45

T.C. 261, 274 (1965); sec. 1.183-2(b)(4), Income Tax Regs.

Generally, however, an expectation that assets “may appreciate is

not sufficient, in itself, to demonstrate that an activity was

engaged in for profit.”   Hendricks v. Commissioner, supra at 100.
                              - 24 -

     Although petitioner, at the time of his purchase in 1990,

may have had an expectation that the Feadship would appreciate in

value, the evidence before us establishes that petitioner had no

such expectation during 1995, 1996, and 1997.    In December of

1994, petitioner listed the Feadship for sale at $2.4 million.

As discussed previously, this amount was significantly less than

petitioner’s cumulative purchase and restoration costs relating

to the Feadship.

     As stated, petitioner acknowledged that the purpose of

chartering the Feadship in 1995, 1996, and 1997 was to offset the

costs of operating the Feadship while it was listed for sale.       As

one of petitioners’ witnesses testified, “if * * * you charter a

boat, you can make a couple of bucks * * *.”


Time and Effort Expended by Petitioners

     A profit objective may be indicated by the amount of

personal time and effort a taxpayer devotes to carrying on an

activity.   Sec. 1.183-2(b)(3), Income Tax Regs.    Petitioner’s

time during the years at issue was largely devoted to his medical

practice, allowing petitioner little time to devote to matters

relating to the restoration and to the charter of the Feadship.

     Mrs. Magassy’s efforts relating to the interior design of

the Feadship occurred well after the major costs of the

restoration on the Feadship had been incurred.     Her efforts do

not establish an overall profit objective for petitioner or for
                                - 25 -

SMSM in chartering the Feadship or in restoring the Feadship for

resale.


Success in Carrying On Other Activities

     A taxpayer’s success with other business activities may

indicate a profit objective.    Sec. 1.183-2(b)(5), Income Tax

Regs.     Petitioner is a successful plastic surgeon, but neither he

nor Mrs. Magassy had engaged in activities relating to owning and

operating a luxury yacht.    It appears that petitioner handled

decisions relating to the Feadship quite differently from the

successful manner in which he practiced medicine.


Personal Pleasure or Recreation

     The mere fact that a taxpayer derives personal pleasure from

an activity does not constitute a per se demonstration of a lack

of profit objective.    Sec. 1.183-2(b)(9), Income Tax Regs.

Conversely, where an activity lacks recreational appeal, a profit

objective may be indicated.     Id.

     Yachting inherently involves a luxury indulgence, and

petitioners and petitioners’ family members participated in a

number of trips and entertained on the Feadship.    The evidence

establishes some significant personal recreational aspects to

petitioner’s and to SMSM’s yachting activity.
                               - 26 -

Section 1231 Loss

     It is clear that petitioner’s original purchase of the

Feadship in 1990 and his restoration efforts during the early

1990s did not constitute a trade or business and would not

qualify his $1.93 million loss on the 1997 sale of the Feadship

for section 1231 ordinary loss treatment.    Petitioners argue,

however, that the 1995, 1996, and 1997 charter activity (combined

with petitioner’s original 1990 profit objective for purchasing

the Feadship) constituted a sufficiently regular for-profit

activity that the $1.93 million claimed loss on sale of the

Feadship should qualify for section 1231 ordinary loss treatment.

     On the facts of this case, certainly by 1995 and thereafter

through April of 1997, when petitioner sold the Feadship for

$1.1 million, petitioner did not have a good faith profit

objective relating either to the charter of the Feadship or to

the sale of the Feadship.    During 1995, 1996, and 1997,

petitioner’s and SMSM’s objective in the charter of the Feadship

was to provide funds to offset a portion of the costs of

ownership of the Feadship.

     Also, because of the lack of profit objective associated

with the charter of the Feadship, the charter activity relating

to the Feadship in 1995 through April of 1997 did not constitute

a trade or business, and the Feadship does not qualify for

treatment as trade or business property under section 1231.

Abbene v. Commissioner, T.C. Memo. 1998-330; Budin v.

Commissioner, T.C. Memo. 1994-185.
                               - 27 -

     On the evidence before us, we conclude that petitioner and

SMSM did not have an actual and honest objective that the

Feadship would generate a profit either from its charter or from

its sale.

     In light of our resolution of the above issues, we need not

address respondent’s other arguments.

     Based on the foregoing,

                                         Decision will be entered

                                    for respondent.
