                        T.C. Memo. 2010-185



                      UNITED STATES TAX COURT



 ESTATE OF ROGER E. STANGELAND, DECEASED, LILAH M. STANGELAND,
        EXECUTOR AND LILAH M. STANGELAND, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14402-08.              Filed August 16, 2010.



     Edward M. Robbins, Jr., and Cory Stigile, for petitioners.

     Kris H. An and Nathan C. Johnston, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined deficiencies in

petitioners’ Federal income taxes and penalties as follows:

                                                  Penalty
     Year            Deficiency                 Sec. 6662(a)

     2002             $369,406                    $73,881
     2003              542,776                    108,555
     2004              440,850                     88,170
                               - 2 -

     The issues for decision are whether petitioners may deduct

on Schedule C, Profit or Loss From Business, losses incurred by

Roger Stangeland in the course of his consulting activities,

whether losses attributable to a partnership owning and operating

airplanes are losses from a passive activity, and whether

petitioners are liable for accuracy-related penalties under

section 6662(a).

     The parties also dispute Roger Stangeland’s basis in R & L

Air, which is relevant because Roger Stangeland died in 2004 and

petitioners can deduct from their nonpassive income in 2004 an

amount of R & L Air’s loss from a passive activity that depends

on Roger Stangeland’s basis.   See sec. 469(g).    This issue has

been postponed for further proceedings.

     All section references are to the Internal Revenue Code for

the years in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.     Lilah

Stangeland resided in California at the time the petition was

filed.   Roger Stangeland (decedent) died on February 27, 2004.

     Petitioners owned numerous companies.   Between 2002 and

2004, petitioners had ownership interests in:     (1) Casa

Encantada, a hotel/motel in Acapulco, Mexico; (2) Wauconda
                               - 3 -

Associates, an entity formed to own and operate the Liberty

Square Shopping Center in Wauconda, Illinois; (3) Lido Partners,

an entity formed to own and operate the Via Lido Shopping Center

in Newport Beach, California; (4) Warehouse Investment Partners,

an entity formed to own and operate a warehouse in La Mirada,

California; (5) Rancho Encantado, Inc., an S corporation that

owns and operates a residential rental property and walnut grove

near Santa Barbara, California; (6) Lido Diner, L.L.C., an entity

formed to own and operate Lido Diner, a restaurant in Newport

Beach, California; (7) New Twist, L.L.C., an entity formed to own

and manage two retail stores in Eugene, Oregon; (8) Hawaiian

Fruit Specialties, L.L.C., an entity formed to market fruit jam

products; and (9) R & L Air, L.L.C., an entity formed to own and

lease out two airplanes.

     In addition, between 2002 and 2004, petitioners were the

sole shareholders of Encantado Enterprises, Inc., an S

corporation that held a 99-percent limited partnership interest

in the Stangeland Family Limited Partnership.   Petitioners held

directly a 1-percent general partnership interest in the

Stangeland Family Limited Partnership.   The Stangeland Family

Limited Partnership had ownership interests in the following

entities:   (1) Indianhead Mountain Enterprises, L.L.C., an entity

formed to own and operate the Indianhead Mountain Resort in

Michigan; (2) Indianhead Mountain, L.L.C., an entity formed to
                               - 4 -

hold title to the liquor license for the Indianhead Mountain

Resort; and (3) Quality Drug Corp., an entity formed to own and

operate drug stores in Newport Beach and Laguna Beach,

California.   In 2003, Quality Drug Holdings Corp. was formed and

became the owner of Quality Drug Corp.   Petitioners received an

ownership interest in Quality Drug Holdings Corp.

     We refer collectively to all of the above businesses as the

businesses or petitioners’ businesses.   Except for Casa

Encantada, Rancho Encantado, Encantado Enterprises, and R & L

Air, petitioners share ownership of the businesses with third

parties or their children.   Mrs. Stangeland kept track of the

books, records, and miscellaneous expenses and wrote the checks

for Rancho Encantado.

     The businesses each had separate management groups.    The

pharmacies owned by Quality Drug Corp. sold jams produced by

Hawaiian Fruit Specialties, but other than that, there were no

products produced by one of petitioners’ businesses and used by

another.

     Aside from his business interests, decedent served on the

boards of the Boy Scouts of America, the Los Angeles Chamber of

Commerce, the Pasadena Playhouse, the Board of Fellows of

Claremont Graduate School, and St. John’s Northwestern Military

Academy.   Decedent was the president of petitioners’ private

charity, the Roger and Lilah Stangeland Foundation, and
                               - 5 -

petitioners were also active in fundraising for Methodist

Hospital, the Pasadena Playhouse, and St. John’s Northwestern

Military Academy.

     Decedent owned and operated a consulting services business

called ResEnt as a sole proprietorship to help him manage

petitioners’ businesses.   Decedent worked approximately 50 hours

a week for ResEnt.   Petitioners’ 2002, 2003, and 2004 Forms 1040,

U.S. Individual Income Tax Return, included Schedules C for

ResEnt.   Petitioners recognized no income from decedent’s

consulting services, although decedent did report some income on

his Schedules C from subletting part of ResEnt’s office space.

Decedent incurred expenses that were reported on his ResEnt

Schedules C and include office rent, supplies, travel,

accounting, and legal fees.   Decedent also hired Joanne Caccamo

as his executive assistant and reported her salary as an expense

on the ResEnt Schedules C under “Wages”.

     In 2003, decedent hired Roger Henn to help find ways to

operate petitioners’ businesses more profitably and efficiently,

and to help decedent identify new business ventures.   Henn helped

decedent find and acquire businesses in situations where decedent

thought he had a particular skill or insight that could help

those businesses grow and either make them profitable in the long

run or put them in a position where they could be sold for a

profit.   Henn was compensated by ResEnt in 2003 and 2004, and
                                - 6 -

decedent reported Henn’s compensation as an expense on the ResEnt

2003 and 2004 Schedules C under “Legal and professional

services”.

       Decedent and Henn provided a number of services to

petitioners’ businesses to sustain or enhance their

profitability.    For example, decedent oversaw the construction of

the Lido Diner and designed the menu.      Decedent and Henn also

designed the store layout for the second of Quality Drug Corp.’s

pharmacies.    Henn helped create Quality Drug Corp.’s

infrastructure and conducted negotiations to acquire the location

for a third store.    Henn was also involved in the day-to-day

management of Indianhead Mountain.      In no case was either

decedent or Henn reimbursed for his services by the business he

was advising.

       When either decedent or Henn traveled to advise the

management of petitioners’ businesses, he often used R & L Air’s

airplanes.    In 2002, R & L Air owned two airplanes--a King Air

and a Canadair Challenger.    In December 2002, R & L Air conducted

a like-kind exchange, trading the Challenger for a Gulfstream G-

III.    On its 2002 Form 8824, Like-Kind Exchanges, R & L Air

reported that it transferred the Challenger, with a fair market

value of $4.5 million, on December 30, 2002, and received the

Gulfstream, with a fair market value of $5,808,236.      R & L Air

completely refurbished the Gulfstream in 2003, replacing the
                               - 7 -

interior and painting the exterior.    R & L Air included two

entries to its 2003 depreciation schedule:    “GS3-1031 NEW”, with

an unadjusted cost or basis of $1,508,236, and “GS3-REFURBISH”,

with an unadjusted cost or basis of $1,865,200.    R & L Air

continued to operate the King Air and Gulfstream in 2004.

     To help manage the airplanes, R & L Air hired Pinnacle Air

Group, Inc.   In the Aircraft Management Agreement, signed by the

parties in September 2000 and again in October 2003, Pinnacle Air

Group agreed that

     1.2 Manager [Pinnacle Air Group] shall supply to owner
     [R & L Air] all services and functions customarily
     provided pursuant to management agreements including,
     but not limited to:

     a.   Employment and/or supervision of flight and
          maintenance personnel assigned to Owner’s
          Aircraft;

     b.   Maintenance management at contract facilities, and
          related maintenance support functions;

     c.   Aircraft insurance through Manager fleet policy,
          * * *

     d.   Liaison with aviation regulatory agencies
          including the FAA on Owner’s behalf and compliance
          with all statutes, ordinances, rules and
          regulations enforced by such agencies;

     e.   Flight and maintenance scheduling, planning, and
          communications;

     f.   Record keeping, reporting, budgeting, and other
          administrative systems;

     g.   Travel support services for Owner’s passengers, as
          required;
                                 - 8 -

     h.   Miscellaneous support services associated with the
          daily operation, maintenance, scheduling, and
          administration of the Aircraft;

     i.   Management supervision of the operation and
          maintenance of the Aircraft; and,

     j.   Provide the necessary FAR Part 91 Aircraft Lease
          Agreements to Owner and Lessee should such
          arrangements be required. In addition, Manager
          will provide Owner with necessary flight time
          information for Lessee invoicing purposes.
          Manager will be responsible for invoicing each
          respective Lessee for Pilot Services and
          associated expenses. Pilot Service revenue
          collected from Lessee will be credited to Owners
          [sic] account accordingly.

When one of the R & L Air airplanes needed maintenance, Curt

Pavlicek, the owner of Pinnacle Air Group, would call decedent

with bids from various maintenance facilities and would review

each item of maintenance with him.       Pinnacle Air Group charged R

& L Air a monthly management fee for the services listed in the

aircraft management agreement.

     Both decedent and Pavlicek were involved in the negotiations

for the sale of the Challenger and the purchase and refurbishment

of the Gulfstream.   At times during the sale, purchase, and

refurbishment, Pavlicek would speak with decedent three or four

times a week.   During the refurbishment of the Gulfstream,

decedent and Pavlicek met in Appleton, Wisconsin, for a couple of

days to decide what features to install in the Gulfstream.      In

return for Pinnacle Air Group’s help in arranging the

transaction, R & L Air paid Pinnacle Air Group a commission.
                                 - 9 -

     When ResEnt used one of R & L Air’s airplanes, Caccamo was

responsible for keeping track of the expenses.    Caccamo would

receive the flight logs from the pilots of the planes and would

document, among other things, the flight number, the mileage, and

the flight’s business purpose.

     In addition to flying for business, decedent also used R & L

Air for flights related to his charitable activities.    Some of

those flights were billed to, and paid for by, ResEnt, even

though they were unrelated to petitioners’ businesses.    Some

flights paid for by ResEnt were for petitioners’ pursuits of

private investment opportunities not directly related to

petitioners’ other businesses.    For example, on several occasions

in 2002, Caccamo’s log listed petitioners’ flights to San Jose

for meetings with a silk flower/floral manufacturing and design

company decedent was considering acquiring.    On November 25,

2002, petitioners flew to Minneapolis for meetings with Quality

Drug Corp. partners to discuss, among other things, the silk

flower manufacturing company, and for Thanksgiving.    On June 27,

2003, Henn flew to Oakland to meet with the silk flower

manufacturing company.

     Petitioners’ 2002-2004 Federal income tax returns were

prepared under the direction of George McCrimlisk, an accountant

with over 20 years of experience.    On November 7, 2003, an

opinion letter directed to decedent by Min Yoo from the
                              - 10 -

accounting firm KPMG (the KPMG letter) addressed the question of

whether R & L Air should be classified as a passive activity.

The letter first concluded that R & L Air is not engaged in

rental activity because the average period of customer use of the

planes is less than 7 days.   The letter then addressed whether

decedent materially participated in R & L Air.   It concluded that

he did, because

     As Mr. Stangeland has the sole responsibility for
     running the daily business and seeing to all the
     details, he has regular, continuous and substantial
     involvement. He alone ensures that his vision and
     direction for the business are being appropriately
     executed. It is our understanding that Mr. Stangeland
     spends greater than 500 hours per year on the airplane
     business.

The letter also noted that “Mr. Stangeland is the only other

individual performing services besides the pilot who works for

the leasing company.   As such, he is the one who shoulders all

the managerial responsibilities of running the business.”

     Petitioners created a living trust (the trust) on December

23, 1988, for which petitioners were the grantors and co-

trustees.   The trust document states:

          9.1 Succession of Co-Trustee. If either
     individual Trustee named in this Trust Agreement shall
     cease to act as Co-Trustee hereunder, then the other
     individual Co-Trustee shall act as sole Trustee under
     this Trust Agreement.

          9.2 Designated Successor Trustee. If both
     individual Co-Trustees named in this Trust Agreement
     shall cease to act as Trustee hereunder, then GREGORY
     P. STONE shall act as successor Trustee hereunder. If
     he shall fail to qualify or cease to act as Trustee
                              - 11 -

     hereunder, then the following named alternative
     successor Trustees shall serve in the order listed:
               FIRST: MICHAEL F. HENN
               SECOND: SECURITY PACIFIC NATIONAL BANK

On February 26, 2004, petitioners transferred assets into the

trust, including their interests in R & L Air.   After decedent’s

death, Mrs. Stangeland signed the checks for ResEnt.   Mrs.

Stangeland became the final authority with regard to petitioners’

businesses.

                              OPINION

     Respondent determined that petitioners could not deduct

expenses for ResEnt consulting activities on decedent’s Schedules

C because ResEnt is not a trade or business.   Respondent also

argues that petitioners’ losses from R & L Air are passive

activity losses and should be suspended under section 469.

A. Burden of Proof

     Section 7491(a)(1) provides that

     If, in any court proceeding, a taxpayer introduces
     credible evidence with respect to any factual issue
     relevant to ascertaining the liability of the taxpayer
     for any tax imposed by subtitle A or B, the Secretary
     shall have the burden of proof with respect to such
     issue.

Petitioners argue that they have satisfied the requirements of

section 7491(a)(1) and (2) to shift the burden of proof “for each

of the issues before the court other than the passive activity

loss hours issue”.   Most of the issues in this case are decided

on the preponderance of the evidence, so the burden of proof is
                               - 12 -

not relevant.   See Estate of Black v. Commissioner, 133 T.C. __,

__ (2009) (slip op. at 30); Knudsen v. Commissioner, 131 T.C.

185, 189 (2008).   When we make assumptions which support

respondent’s determination, it is because petitioners have failed

to introduce credible evidence to the contrary, so the burden of

proof does not shift.    See sec. 7491(a)(1).

B. Schedule C Expenses

     Section 162(a) provides that “There shall be allowed as a

deduction all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business”.   “[T]o be engaged in a trade or business, the taxpayer

must be involved in the activity with continuity and regularity

and * * * the taxpayer’s primary purpose for engaging in the

activity must be for income or profit.”    Commissioner v.

Groetzinger, 480 U.S. 23, 35 (1987).

     Respondent argues that ResEnt is not a trade or business

because decedent did not engage in consulting services for income

or profit.   Petitioners’ response is two pronged.   First,

petitioners argue that decedent engaged in ResEnt for income or

profit because ResEnt’s consulting increased the profitability of

petitioners’ other businesses.    Alternatively, petitioners argue

that under section 183 the ResEnt undertaking is part of an

activity that encompasses all of petitioners’ other undertakings
                              - 13 -

(petitioners’ businesses), and decedent’s profit motive in the

ResEnt undertaking must be viewed from this perspective.

     1. Whether ResEnt Was Conducted for Profit

     ResEnt received no compensation for its consulting services.

Petitioners argue that ResEnt was conducted for profit, namely

the increased value of petitioners’ businesses.   Petitioners have

persuasively argued that decedent’s ResEnt activities added value

to petitioners’ various businesses.

     However, the Supreme Court has long held that activity

geared towards increasing the value of investments is not a trade

or business.   In Whipple v. Commissioner, 373 U.S. 193, 202-203

(1963), the Supreme Court stated:

           Devoting one’s time and energies to the affairs of
     a corporation is not of itself, and without more, a
     trade or business of the person so engaged. Though
     such activities may produce income, profit or gain in
     the form of dividends or enhancement in the value of an
     investment, this return is distinctive to the process
     of investing and is generated by the successful
     operation of the corporation’s business as
     distinguished from the trade or business of the
     taxpayer himself. When the only return is that of an
     investor, the taxpayer has not satisfied his burden of
     demonstrating that he is engaged in a trade or business
     since investing is not a trade or business and the
     return to the taxpayer, though substantially the
     product of his services, legally arises not from his
     own trade or business but from that of the corporation.
     * * *

          If full-time service to one corporation does not
     alone amount to a trade or business, which it does not,
     it is difficult to understand how the same service to
     many corporations would suffice. To be sure, the
     presence of more than one corporation might lend
     support to a finding that the taxpayer was engaged in a
                             - 14 -

     regular course of promoting corporations for a fee or
     commission, * * * or for a profit on their sale, see
     Giblin v. Commissioner, 227 F.2d 692 * * * [(5th Cir.
     1955)], but in such cases there is compensation other
     than the normal investor’s return, income received
     directly for his own services rather than indirectly
     through the corporate enterprise * * *. On the other
     hand, since the Tax Court found, and the petitioner
     does not dispute, that there was no intention here of
     developing the corporations as going businesses for
     sale to customers in the ordinary course, the case
     before us inexorably rests upon the claim that one who
     actively engages in serving his own corporations for
     the purpose of creating future income through those
     enterprises is in a trade or business. That argument
     is untenable * * *

This Court elaborated:

          To fall within the rule established in Giblin
     [holding that a certain type of consulting is a trade
     or business], petitioner must show that the entities
     were organized with a view to a quick and profitable
     sale after each business had become established, rather
     than with a view to long-range investment gains. * * *

          It is the early resale which makes the profits
     income received directly for services, for the longer
     an interest is held, the more profit becomes
     attributable to the successful operation of the
     corporate business. * * *

Deely v. Commissioner, 73 T.C. 1081, 1093-1094 (1980); see

Ackerman v. Commissioner, T.C. Memo. 2009-80; Farrar v.

Commissioner, T.C. Memo. 1988-385; see also Bell v. Commissioner,

200 F.3d 545, 548 n.2 (8th Cir. 2000), affg. T.C. Memo. 1998-136.

In Deely, the taxpayers sought to deduct the full amount of a

loan made to companies they owned as a bad business debt.     Deely

v. Commissioner, supra at 1082.   We found that the taxpayers did

not organize entities with the intent for quick resale, but held
                                - 15 -

on to profitable investments.    Id. at 1094-1096.   We therefore

concluded that the taxpayers acted as investors and that their

activities were investing activities and not a trade or business.

Id. at 1096.

     In Ackerman v. Commissioner, supra, we considered the

taxpayer’s contention that the advisory services he provided to

companies he owned were a trade or business.    We stated that for

the taxpayer to prevail, he must show that his advisory services

were provided with the purpose of selling his interest in the

relevant companies at a profit in the ordinary course of his

alleged business.   Id.

     ResEnt’s consulting activities were geared towards

increasing the investment value of petitioners’ businesses, and

ResEnt was therefore not a trade or business.    ResEnt did not

provide a particular service to petitioners’ businesses.    Henn

testified that he was hired by ResEnt for

          At the outset principally two purposes. One was
     to help Roger [decedent] find ways to operate the
     businesses that he owned better; that is, more
     profitably, more efficiently and ultimately to produce
     a higher level of profit, and secondly to help him
     identify new business ventures that he could own and
     operate again for the purpose of producing a profitable
     business.

ResEnt provided consulting for the general purpose of increasing

the value of petitioners’ other businesses.    Decedent was not

conducting a trade or business; he was monitoring his

investments.   The second purpose for which Henn was hired, to
                              - 16 -

find new investments, further enforces our conclusion that ResEnt

was involved in investing activities, not a trade or business.

Petitioners’ suggestion that the potential investment in the silk

flower manufacturing company would have been an enhancement of

petitioners’ existing businesses rather than a new acquisition is

unconvincing and contrary to Henn’s testimony, in which he

referred to “new business ventures”.

     Petitioners have not shown that decedent’s consulting

services were provided with the purpose of selling petitioners’

interest in the businesses in a quick and profitable sale, rather

than with a view to long-term investment gains.   Although the

record does not establish when petitioners acquired all of their

businesses, apparently they did not sell any businesses during

the 3 years under consideration.   Further, many of the businesses

involved joint ventures, making them more difficult to sell.     The

services decedent provided were geared towards enhancing a

business’s long-term profitability.    This case is unlike Lundgren

v. Commissioner, 376 F.2d 623, 627-628 (9th Cir. 1967) (holding

that the taxpayer was involved in a trade or business when the

return sought was shown to be different from that flowing to an

investor), revg. T.C. Memo. 1965-314, a case relied on by

petitioners.   We conclude that decedent was not in the business

of providing consulting services to companies he owned so he

could profit from their quick resale in the ordinary course of
                               - 17 -

his business.   We therefore hold that ResEnt is not a trade or

business but is rather a vehicle for enhancing the value and

profitability of petitioners’ investments.

     Petitioners argue that this case is similar to Campbell v.

Commissioner, 868 F.2d 833 (6th Cir. 1989), affg. in part and

revg. in part T.C. Memo. 1986-569, where the court considered

whether a taxpayer could deduct losses from a partnership formed

to lease an airplane to a corporation controlled by the taxpayer

and the other partners.    In Campbell the court found that a

profit motive could exist for an activity that derived its income

from a related corporation.   See De Mendoza v. Commissioner, T.C.

Memo. 1994-314.   Campbell is distinguishable on numerous grounds.

First, the partners and the shareholders of the two entities in

Campbell were substantially the same.   In this case, the owner of

ResEnt, decedent, is not substantially the same as the owners of

the businesses, which, depending on the particular business,

consisted of petitioners and petitioners’ children or third

parties.   Second, in Campbell the purpose of the partnership was

to lease an airplane to a particular corporation; the two

entities were closely related.   In this case, petitioners viewed

ResEnt as an independent activity, attributing all consulting

activity to ResEnt regardless of the entity benefited by the

activity and using ResEnt as a vehicle for deducting expenses

unrelated to consulting.   Third, our decision that ResEnt is not
                                - 18 -

a trade or business turns on our finding that ResEnt was a

vehicle primarily for the enhancement of petitioners’

investments.   In contrast to the partnership in Campbell, which

provided airplane leasing, ResEnt did not provide a particular

service to petitioners’ businesses but tried to increase their

profitability in general.   The type of services ResEnt provided

further supports our conclusion that it operated to enhance

petitioners’ investments and was not a trade or business under

section 162.

     Petitioners argue in the alternative that if ResEnt expenses

are not deductible, they should be viewed as capital

contributions that increase petitioners’ bases in the businesses.

Petitioners’ bases in all their businesses except R & L Air are

not relevant to deciding their tax deficiencies or penalties for

the years at issue.   To the extent decedent’s basis in R & L Air

is relevant to deciding petitioners’ deficiencies or penalties,

petitioners have failed to present reliable evidence of the value

of ResEnt’s consulting services or the proper allocation of

ResEnt expenses to R & L Air.    See Rule 142(a).

     Petitioners have not argued that ResEnt’s expenses are

miscellaneous itemized deductions, deductible on Schedule A,

Itemized Deductions, because they are expenses for production of

income.   See secs. 63(a), (d), 67(a) and (b), 212.   The amount

deductible under section 212 is limited to the amount exceeding 2
                              - 19 -

percent of the taxpayer’s adjusted gross income.   Secs. 63(a),

(d), 67(a) and (b), 162(a).   Furthermore, the total amount of

itemized deductions on Schedule A may be reduced if the

taxpayer’s adjusted gross income exceeds an applicable amount.

Sec. 68(a) and (b).   We assume that petitioners did not argue

that ResEnt’s expenses are itemized deductions because the

characterization would be of limited use given the restrictions.

Because petitioners do not argue that issue, we do not address

it.

      2. Whether ResEnt and Petitioners’ Other Businesses Are One
         Activity Under Section 183

      Petitioners argue in the alternative that to determine

whether ResEnt is operated for profit, we should view it as

merged with petitioners’ other businesses.   Section 1.183-

1(d)(1), Income Tax Regs., provides the standard for determining

whether two or more undertakings may be consolidated into one

activity for this purpose:

      [W]here the taxpayer is engaged in several
      undertakings, each of these may be a separate activity,
      or several undertakings may constitute one activity. In
      ascertaining the activity or activities of the
      taxpayer, all the facts and circumstances of the case
      must be taken into account. Generally, the most
      significant facts and circumstances in making this
      determination are the degree of organizational and
      economic interrelationship of various undertakings, the
      business purpose which is (or might be) served by
      carrying on the various undertakings separately or
      together in a trade or business or in an investment
      setting, and the similarity of various undertakings.
      Generally, the Commissioner will accept the
      characterization by the taxpayer of several
                              - 20 -

     undertakings either as a single activity or as separate
     activities. * * *

In addition to the factors in the regulation, we have also

considered:   (a) Whether the undertakings are conducted at the

same place; (b) whether the undertakings were part of the

taxpayer’s efforts to find new sources of revenue from existing

assets or relationships; (c) whether the undertakings were formed

as separate activities; (d) whether one undertaking benefited

from the other; (e) whether the taxpayer used one undertaking to

advertise the other; (f) the degree to which the undertakings

shared management; (g) the degree to which one caretaker oversaw

the assets of both undertakings; (h) whether the taxpayer used

the same accountant for the undertakings; and (i) the degree to

which the undertakings shared books and records.   See Keanini v.

Commissioner, 94 T.C. 41, 46 (1990); see also Topping v.

Commissioner, T.C. Memo. 2007-92; Mitchell v. Commissioner, T.C.

Memo. 2006-145.   Petitioners propose that under these standards

ResEnt and their businesses should be viewed as one activity.

Whether we view all the businesses and ResEnt as one activity or

we view each business and the ResEnt consulting activity

associated with that business as one activity, petitioners’

argument fails.

     Petitioners’ businesses cannot be viewed as one activity

under section 183.   Other than decedent, who was involved in all

of petitioners’ businesses, the businesses had different
                              - 21 -

management structures.   While some businesses may have

complemented one another--for example, Hawaiian Fruit

Specialties’ jam was sold in Quality Drug Corp.’s stores and Lido

Partners shared partners with Lido Diner and Quality Drug

Holdings Corp.--the businesses as a whole were separately

functioning entities, neither dependent on nor providing benefits

to one another.   Petitioners argue that the businesses all drew

on decedent’s knowledge of retail sales, but the businesses fail

almost all the additional factors:     The businesses were not

conducted in the same place; they were formed and treated by

petitioners as separate entities; except Hawaiian Fruit

Specialties, the businesses did not benefit from each other; they

shared only very limited management; and they kept separate books

and records.

     Petitioners also cannot aggregate each business with the

ResEnt consulting activity associated with that business.

Decedent conceived of and structured ResEnt as separate from

petitioners’ businesses, with separate offices and separate

employees.   Decedent conducted his advising through ResEnt,

regardless of the businesses he was advising.     Decedent also used

ResEnt as a vehicle for deducting the cost of trips that were not

deductible as a trade or business expense, such as trips to St.

John’s Northwestern Military Academy for board meetings.

Decedent’s nonconsulting activities belie petitioners’ arguments
                              - 22 -

that under section 1.183-1(d), Income Tax Regs., ResEnt and

petitioners’ businesses are economically intertwined and should

be joined to form one activity.

     The additional factors, on balance, favor respondent.

ResEnt and the businesses had separate offices, so the first

factor favors respondent.   The businesses were not created to

create a new revenue source from a particular asset, so the

second factor favors respondent.    The businesses were formed as

separate entities, so the third factor favors respondent.     ResEnt

did provide benefits to the businesses, so the fourth factor

favors petitioners.   ResEnt did not function to advertise or

promote the businesses, so the fifth factor is neutral.   Decedent

played a role in managing the companies and was also involved in

ResEnt, but there is no evidence of other management overlap

between ResEnt and the businesses, so the sixth factor favors

respondent.   Decedent oversaw both ResEnt and the businesses, so

the seventh factor favors petitioners.   ResEnt had its own

bookkeeper, who kept separate books for ResEnt, so the eighth and

ninth factors favor respondent.

     Given that decedent was free to choose the structure of

ResEnt, we view with suspicion petitioners’ current attempt to

convince us that the separate structures of ResEnt and the

businesses should be disregarded.   See Don E. Williams Co. v.

Commissioner, 429 U.S. 569, 579-580 (1977); Yamamoto v.
                             - 23 -

Commissioner, 73 T.C. 946, 954-955 (1980), affd. without

published opinion 672 F.2d 924 (9th Cir. 1982).   ResEnt’s

structure and books reflect that decedent used ResEnt as a

catchall to expense his investment and charitable activities on

Schedules C, not as a vehicle to enhance a particular business.

Petitioners may arrange their affairs to make a profit in a

particular corporation, see Campbell v. Commissioner, 868 F.2d at

836, but they may not create structures with separate offices,

separate management, separate owners, separate books, and

separate undertakings and then later claim that the structures

they created are really one activity under section 183.    We

conclude that ResEnt and the businesses are separate activities

under section 183, and we will not look at the profit of the

businesses in assessing whether ResEnt was operated for profit.

     In sum, we conclude that ResEnt was not a trade or business

and petitioners were not entitled to deduct ResEnt’s expenses on

Schedule C.

C. R & L Air’s Losses

     Respondent argues that R & L Air’s losses are passive

activity losses and should be suspended under section 469.

Section 469(a)(1) and (d) suspends the deductibility of losses

from certain passive activities to the extent the losses exceed

the aggregate income those activities generate.   Generally, a

passive activity is a trade or business in which the taxpayer
                              - 24 -

does not materially participate.   Sec. 469(c)(1).    Material

participation is defined generally as regular, continuous, and

substantial involvement in the business operations.     Sec.

469(h)(1).

     A taxpayer can establish material participation by

satisfying any one of the seven tests provided in the

regulations.   Sec. 1.469-5T(a), Temporary Income Tax Regs., 53

Fed. Reg. 5725-5726 (Feb. 25, 1988); see Akers v. Commissioner,

T.C. Memo. 2010-85.   Petitioners direct our attention to four of

those tests.

     The first test is whether an individual participates in the

activity for over 500 hours during the year.   Sec.

1.469-5T(a)(1), Temporary Income Tax Regs., supra.     The second

test is the significant participation activity test.     Under that

test, (1) the activity must be a significant participation

activity for the taxable year, and (2) the individual’s aggregate

participation in all significant participation activities during

the year must exceed 500 hours.    Sec. 1.469-5T(a)(4), Temporary

Income Tax Regs., supra.   An activity is a significant

participation activity only if (1) the activity is a trade or

business, (2) the individual participates in the activity for

more than 100 hours during the year, and (3) the individual

cannot establish material participation under any of the other

material participation tests in the regulations.     Sec.
                               - 25 -

1.469-5T(c), Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb.

25, 1988).   The third test is whether, based on all of the facts

and circumstances, the individual participates in the activity on

a regular, continuous basis.   Sec. 1.469-5T(a)(7), Temporary

Income Tax Regs., supra.   However, under this test, an

individual’s services performed in the management of an activity

are not taken into account, unless no person other than the

individual who performs services in connection with the

management of the activity receives compensation in consideration

for such services and no person performs services in connection

with the management of the activity that exceed the amount of

services performed by the individual.   Sec. 1.469-5T(b)(2)(ii),

Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).

The fourth test is whether an individual materially participated

in the activity for 5 of the past 10 years under a different test

in the regulations.   Sec. 1.469-5T(a)(5), Temporary Income Tax

Regs., supra.

     Under all these tests, participation in an activity is

defined to exclude work done by an individual in the individual’s

capacity as an investor in the activity unless the individual is

directly involved in the day-to-day management or operations of

the activity.   Sec. 1.469-5T(f)(2)(ii)(A), Temporary Income Tax

Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988).   Work done by an

individual in the individual’s capacity as an investor in the
                                - 26 -

activity includes studying and reviewing financial statements or

reports on operations of the activity, preparing or compiling

summaries or analyses of the finances or operations of the

activity for the individual’s own use, and monitoring the

finances or operations of the activity in a nonmanagerial

capacity.   Sec. 1.469-5T(f)(2)(ii)(B), Temporary Income Tax

Regs., supra.   Any participation by an individual’s spouse is

treated as participation by the individual.      Sec. 1.469-5T(f)(3),

Temporary Income Tax Regs., supra.       We therefore treat

petitioners as one unit for the purposes of determining their

participation in an activity.

     Petitioners do not argue, nor would the record support a

finding, that they participated in R & L Air for over 500 hours

in any of the tax years in issue.    However, decedent did work

over 500 hours in 2002 and 2003 on ResEnt.      Petitioners argue

that for the purposes of the passive activity test, we should

view R & L Air and ResEnt as one activity under section 1.469-4,

Income Tax Regs.

     Section 1.469-4(c), Income Tax Regs., provides that multiple

trade or business activities may be treated as a single activity

if the activities constitute an appropriate economic unit for the

measurement of gain or loss for the purposes of section 469.        A

trade or business activity is defined as an activity (other than

activities that are irrelevant here) that involves the conduct of
                              - 27 -

a trade or business under section 162, is conducted in

anticipation of the commencement of a trade or business, or

involves research or experimental expenditures that are

deductible under section 174 or would be deductible if the

individual adopted the method described in section 174(a).     Sec.

1.469-4(b)(1), Income Tax Regs.

     To aggregate R & L Air and ResEnt, petitioners must show

that both R & L Air and ResEnt are trade or business activities

as defined in the regulations.    Petitioners do not argue that

ResEnt was conducted in anticipation of the commencement of a

trade or business.   Nor can we, on this record, determine what

such a trade or business would be.     Petitioners also do not argue

that ResEnt involves research or experimental expenditures that

are deductible under section 174.    Nor can we, on this record,

determine what such research expenditures would be.    We are left,

then, with the question of whether ResEnt is an activity that

involves the conduct of a trade or business under section 162, an

issue we addressed earlier.   We decided that ResEnt did not

involve the conduct of a trade or business under section 162.      We

therefore conclude that ResEnt is not a trade or business

activity under section 1.469-4(b)(1), Income Tax Regs., and that

ResEnt cannot be aggregated with R & L Air under section

1.469-4(c), Income Tax Regs., to help petitioners meet the 500
                              - 28 -

hour threshold under section 1.469-5T(a)(1), Temporary Income Tax

Regs., supra.

     Petitioners argue in the alternative that R & L Air

satisfies the significant participation activity test under

section 1.469-5T(a)(4), Temporary Income Tax Regs., supra,

because both R & L Air and ResEnt are significant participation

activities and petitioners participated in both activities for

more than 100 hours each and more than 500 hours combined.    See

sec. 1.469-5T(c)(2), Temporary Income Tax Regs., supra.

     An activity is a significant participation activity of an

individual if and only if (1) the activity is a trade or business

activity under section 1.469-1T(e)(2), Temporary Income Tax

Regs., 57 Fed. Reg. 20753 (May 15, 1992), in which the individual

significantly participates, and (2) the activity would be an

activity in which the individual does not materially participate

if material participation were determined without regard to the

significant participation activity test.    Sec. 1.469-5T(c)(1),

Temporary Income Tax Regs., supra.     The first prong, the trade or

business activity test, is the same as under section

1.469-4(b)(1), Income Tax Regs.   See sec. 1.469-1T(e)(2),

Temporary Income Tax Regs., supra (reference to section 1.469-

1(e)(2), Income Tax Regs. (reference to section 1.469-4(b)(1),

Income Tax Regs.)).   To satisfy the second prong, the individual

(1) must have less than 500 hours of participation, as
                               - 29 -

participation in excess of 500 hours would satisfy the test at

section 1.469-5T(a)(1), Temporary Income Tax Regs., supra, and

(2) must not be the individual with the most hours of

participation in the activity, as a person with the most hours of

participation in the activity, if in excess of 100 hours,

satisfies the test at section 1.469-5T(a)(3), Temporary Income

Tax Regs., supra.    See Scheiner v. Commissioner, T.C. Memo. 1996-

554.

       ResEnt is not a significant participation activity.   We have

already decided that ResEnt is not a trade or business activity

under section 1.469-4(b)(1), Income Tax Regs.    Furthermore, even

if we assumed ResEnt is a trade or business activity, it would

fail the second prong of the test because decedent participated

in ResEnt for over 500 hours and therefore materially

participated in ResEnt under section 1.469-5T(a)(1), Temporary

Income Tax Regs., supra.

       Although ResEnt is not a significant participation activity,

petitioners’ businesses may be.    Respondent does not contest that

petitioners’ other businesses are trades or businesses under

section 162.    Petitioners did not participate in the businesses

for over 500 hours; and since each of the businesses had full-

time employees, petitioners did not have the most participation

in the businesses.    Thus, the final step in our analysis is to

determine whether petitioners’ participation in any of the
                              - 30 -

businesses exceeds 100 hours, and whether petitioners’

participation in all significant participation activities exceeds

500 hours, for each year in issue.     Sec. 1.469-5T(a)(4),

Temporary Income Tax Regs., supra.

     The regulations provide that participation in an activity

may be established by any reasonable means.     While

contemporaneous records are not required, reasonable means may

include appointment books, calendars, or narrative summaries.

Sec. 1.469-5T(f)(4), Temporary Income Tax Regs., supra.       The

regulations do not allow a postevent “ballpark guesstimate”, and

we are not bound to accept the unverified, undocumented testimony

of taxpayers.   See Shaw v. Commissioner, T.C. Memo. 2002-35;

Scheiner v. Commissioner, supra.

     To prove the businesses for which, and the number of hours

that, decedent worked in 2002, 2003, and 2004, petitioners

provide both testimony and documentary evidence.     The testimony

consists of Caccamo’s recollections for 2002, 2003, and 2004,

Henn’s recollections for 2003 and 2004, and Pavlicek’s

recollections regarding R & L Air.     The documentary evidence

includes decedent’s calendar and flight logs that indicate the

purposes of decedent’s travel.   Independently, each form of

evidence is insufficient for us to make a determination regarding

the number of hours decedent worked.     The testimony, because it

relates to such a long stretch of time many years ago and because
                               - 31 -

it was given by witnesses who did not personally observe all of

the hours they claimed decedent worked, is unreliable.   The

documentary evidence is insufficient because neither the calendar

nor the flight logs specify the number of hours decedent worked.

They tend to corroborate the testimony of the witnesses because

they show decedent’s involvement with the businesses, but alone

they do not permit us to determine the number of hours decedent

actually worked.   Furthermore, some of the flight logs indicate

flights taken for nonbusiness purposes, and some indicate flights

taken for multiple purposes, some of which were nonbusiness.

Thus, where there is testimony that establishes the amount of

time decedent worked and the documentary evidence corroborates

the witness’s estimations, we accept those estimations as true;

otherwise, we do not.    See Shaw v. Commissioner, supra; Scheiner

v. Commissioner, supra

     Decedent was alive for all of 2002 and 2003.   Pavlicek and

Henn testified regarding decedent’s participation in R & L Air

during those years, and Caccamo and Henn testified regarding

decedent’s participation in petitioners’ other businesses.

Pavlicek testified that he worked closely with decedent, and that

“he pretty much was hands-on to make sure that the aircraft was

doing what he wanted to do.”   For example, although Pavlicek was

responsible for ensuring that the airplanes were properly

maintained, before performing the maintenance Pavlicek would
                               - 32 -

review each procedure with decedent and would get decedent’s

approval for everything.    Pavlicek testified that decedent spent

around 200 hours on maintenance issues.    Decedent sold R & L

Air’s Challenger airplane in December 2002 and purchased a

Gulfstream airplane in May 2003.    Decedent was very involved in

the transaction.    Pavlicek testified that between 2002 and 2003,

decedent spent approximately 500 hours on the negotiations

involved in selling the Challenger and buying and renovating the

Gulfstream.    But Pavlicek also admitted that he did not

personally spend all of the estimated hours with decedent, and

that part of the figure relied on guesswork.    Nonetheless,

Pavlicek’s testimony regarding the time he spent with decedent,

either personally or on the telephone, is sufficient to support

our conclusion that petitioners spent over 100 hours

participating in R & L Air during 2002 and 2003.    Decedent’s

participation was not simply that of an investor because decedent

participated in the sale of the Challenger airplane and the

purchase of the Gulfstream, the renovation of the Gulfstream, and

the maintenance of the airplanes.

     The record does not permit us to determine the number of

hours decedent participated in petitioners’ other businesses

during 2002.    Henn, who worked closely with decedent in 2003, had

not yet joined ResEnt, and Caccamo only testified regarding

decedent’s participation in ResEnt.     The calendars introduced by
                              - 33 -

petitioners are also of no help, because they do not specify the

amount of time decedent spent on each meeting.   We therefore

conclude that for 2002, decedent did not reach the 500 hour

threshold under section 1.469-5T(a)(4), Temporary Income Tax

Regs., supra.

     Henn joined ResEnt in 2003, and worked with decedent on

advising a number of petitioners’ businesses.    He was therefore

able to testify with specificity about decedent’s participation

in those businesses.   Henn testified that in 2003 decedent was

primarily occupied with Quality Drug Corp., Rancho Encantado, and

R & L Air.   For Quality Drug Corp., Henn testified that decedent

designed the Laguna Beach store, supervised its construction, and

hired its store manager.   He estimated that decedent spent around

150 hours working for Quality Drug Corp. in 2003.   Henn also

testified that decedent spent 200 hours working at Rancho

Encantado, supervising harvest operations and otherwise managing

the property.   Although we are skeptical regarding the accuracy

of these estimates, Henn’s testimony regarding the types of

activities that decedent engaged in is credible, and combined

with decedent’s activities for R & L Air, we are convinced that

decedent has met the 500-hour threshold under section

1.469-5T(a)(4), Temporary Income Tax Regs., supra, for 2003.      The

activities above are not activities performed in decedent’s

capacity as an investor under section 1.469-5T(f)(2)(ii),
                              - 34 -

Temporary Income Tax Regs., supra.     We therefore conclude that

petitioners’ losses from R & L Air in 2003 are not losses from a

passive activity under section 469.

     Decedent died in February 2004, and petitioners concede that

decedent did not participate in R & L Air for over 100 hours in

2004.   Petitioners argue that the trust participated in R & L Air

in 2004 by virtue of Henn’s participation.    However, Henn’s role

in the trust is unclear.   Although Henn is designated a successor

trustee of the trust, the trust document states that the

successor trustee may not act as such unless both original

trustees cease to act as trustees.     Petitioners have presented no

evidence that Mrs. Stangeland refused to act as trustee.    In

fact, the record indicates that Mrs. Stangeland assumed some of

decedent’s responsibilities, and signed the checks for ResEnt.

Henn testified that “after Roger passed Lilah assumed the role of

final decisionmaker”.   This testimony leads us to conclude that

Mrs. Stangeland did not resign as trustee of the trust, and thus

Henn was not acting as a trustee.    There is no evidence, and

petitioners do not argue, that Henn was employed by the trust.

Henn was compensated by ResEnt in 2003 and 2004.    Petitioners

have failed to introduce evidence that Henn had any formal

relationship to the trust, that he had any fiduciary relationship

to it, or that he had any powers to bind it.    This case is

therefore materially distinguishable from Carter Trust ex rel.
                              - 35 -

Fortson v. United States, 256 F. Supp. 2d 536 (N.D. Tex. 2003)

(holding that the material participation of a trust should be

determined by reference to the persons acting on the trust’s

behalf).   We need not address whether or how a trust may

materially participate in an activity because we conclude that

petitioners have failed to prove Henn’s relationship with the

trust.   We do not consider Henn’s participation in R & L Air in

determining whether petitioners or the trust materially

participated in R & L Air.

     Petitioners have introduced no evidence of Mrs. Stangeland’s

participation in R & L Air.   Petitioners have failed to satisfy

the requirements of section 7491(a)(1) and (2) to shift the

burden of proof on this issue.   We therefore assume that Mrs.

Stangeland did not materially participate in R & L Air.

Consequently, we sustain respondent’s determination that R & L

Air was a passive activity in 2004.

     Petitioners alternatively argue that they materially

participated in R & L Air because they participated in R & L Air

on a regular, continuous basis, and they fall under the catchall

provision of section 1.469-5T(a)(7), Temporary Income Tax Regs.,

supra.   Petitioners do not fall under that provision because

decedent’s activities, such as overseeing the sale of the

Challenger and the purchase of the Gulfstream, were management

activities.   Pavlicek testified that decedent was “for lack of a
                              - 36 -

better word, the manager of the aircraft.”    But Pinnacle Air

Group, and Pinnacle Air Group’s employees, were also involved in

the management of R & L Air, and they received compensation in

consideration for their services.    Thus, under section

1.469-5T(b)(2), Temporary Income Tax Regs., supra, decedent’s

management activities are not sufficient to constitute material

participation under this test.

     Petitioners’ final argument, that they satisfied section

1.469-5T(a)(5), Temporary Income Tax Regs., supra, also fails.

To satisfy that test, petitioners must show that they materially

participated in R & L Air under another of the material

participation tests for any 5 of the past 10 years.    See id.

They have introduced no credible evidence that they materially

participated in R & L Air under any of the tests for any of the

years preceding 2003.   We conclude that petitioners do not meet

the requirements of section 1.469-5T(a)(5), Temporary Income Tax

Regs., supra.

     In sum, we conclude that petitioners materially participated

in R & L Air in 2003, and its loss during that year is not a loss

from a passive activity.   R & L Air’s losses are losses from a

passive activity in 2002 and 2004.

D. Section 6662 Accuracy-Related Penalties

     Petitioners contest the imposition of accuracy-related

penalties for the tax years in issue.    Section 6662(a) and (b)(2)
                                - 37 -

imposes a 20-percent accuracy-related penalty on any underpayment

of Federal income tax attributable to a substantial

understatement of income tax.    Section 6662(d)(1)(A) defines a

substantial understatement of income tax as an amount exceeding

the greater of 10 percent of the tax required to be shown on the

return or $5,000.

     Under section 7491(c), the Commissioner bears the burden of

production with regard to penalties and must come forward with

sufficient evidence indicating that it is appropriate to impose

penalties.   See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

However, once the Commissioner has met the burden of production,

the burden of proof remains with the taxpayer, including the

burden of proving that the penalties are inappropriate because of

reasonable cause under section 6662(d)(2)(B) or substantial

authority under section 6664(c).    See Rule 142(a); Higbee v.

Commissioner, supra at 446-447.

     Petitioners had substantial understatements of income taxes

in 2002 and 2004.    With regard to those years, the amounts

required to be shown on the returns were $369,406 and $1,195,660,

respectively.   The understatements were $369,406 for 2002 and

$440,850 for 2004.    The understatements each exceed 10 percent of

the tax required to be shown on the respective return and $5,000.

Respondent has shown that penalties are appropriate with regard

to 2002 and 2004.
                              - 38 -

     Because petitioners’ losses from R & L Air in 2003 are not

losses from a passive activity, petitioners’ deficiency in

Federal income tax for 2003 must be recalculated.   It appears

that the recalculated deficiency will result in an understatement

that exceeds 10 percent of the tax required to be shown on the

return and $5,000.   Thus, the section 6662(a) accuracy-related

penalty will be appropriate in 2003 also.   We need not,

therefore, separately discuss negligence as a ground for the

penalty.

     Petitioners argue that they had substantial authority for

their treatment of ResEnt and their characterization of R & L

Air’s losses as nonpassive.   Substantial authority exists when

“the weight of the authorities supporting the treatment is

substantial in relation to the weight of authorities supporting

contrary treatment.”   Sec. 1.6662-4(d)(3)(i), Income Tax Regs.

Petitioners have failed to refer specifically to any of the

authorities listed in section 1.6662-4(d)(3)(iii), Income Tax

Regs.   The cases petitioners cite are materially distinguishable.

We therefore conclude that petitioners did not have substantial

authority for their tax treatment of ResEnt and R & L Air.

     The accuracy-related penalty under section 6662(a) is not

imposed with respect to any portion of the underpayment as to

which the taxpayer acted with reasonable cause and in good faith.

Sec. 6664(c)(1); Higbee v. Commissioner, supra at 448.     The
                                     - 39 -

decision as to whether a taxpayer acted with reasonable cause and

in good faith is made on a case-by-case basis, taking into

account all of the pertinent facts and circumstances.         Sec.

1.6664-4(b)(1), Income Tax Regs.         The most important factor is

the extent of the taxpayer’s effort to assess his or her proper

tax liability.    Id.     “Circumstances that may indicate reasonable

cause and good faith include an honest misunderstanding of fact

or law that is reasonable in light of all of the facts and

circumstances, including the experience, knowledge, and education

of the taxpayer.”       Id.    Reliance on professional advice may

constitute reasonable cause and good faith if, under all the

circumstances, such reliance was reasonable and the taxpayer

acted in good faith.          Freytag v. Commissioner, 89 T.C. 849, 888

(1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868

(1991); sec. 1.6664-4(b)(1), Income Tax Regs.         To justify

reliance, the taxpayer must show that the professional adviser

was supplied with accurate information.          Neonatology Associates,

P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221

(3d Cir. 2002).

     Decedent was a corporate executive for most of his

professional career, and Mrs. Stangeland was involved in some of

petitioners’ businesses.         Petitioners have not introduced

evidence of Mrs. Stangeland’s education, experience, or
                              - 40 -

knowledge; and because they bear the burden of proof, we cannot

consider these factors in their favor.

     We cannot conclude that petitioners’ reliance on

McCrimlisk’s advice regarding the treatment of ResEnt as a trade

or business under section 162 was reasonable or in good faith.

Petitioners deducted through ResEnt personal investment expenses

both related to their private portfolio of interests and related

to new private investments.   They also deducted through ResEnt

the costs of flights undertaken for charitable purposes.     Their

claiming costs of flights that had no business purpose as

business deductions is not reasonable even if blessed by a tax

professional.

     Petitioners apparently deducted expenses of ResEnt on

Schedule C in order to avoid limitations on charitable

contribution deductions and miscellaneous itemized deductions

properly reportable on Schedule A.     See secs. 63(a), (d), 67(a)

and (b), 68(a) and (b), 170, 212.    The unsupportable

characterization of items as business expenses and the

transparent attempt to avoid limitations on itemized deductions

negate reasonable cause and good faith.

     With regard to R & L Air, petitioners failed to provide

McCrimlisk with all the information necessary for him to make a

proper determination of petitioners’ tax liabilities.    McCrimlisk

testified that it was his belief that decedent spent over 500
                                - 41 -

hours on R & L Air in 2002, but evidence supporting that belief

was not introduced.    There are numerous incorrect assumptions in

the KPMG letter.    The letter states that it appears more likely

than not that decedent satisfies the material participation tests

under section 1.469-5T(a)(3) and (7), Temporary Income Tax Regs.,

supra.   However, that conclusion is based on the following

assumptions:   (1) Decedent had the sole responsibility for

running the daily business and seeing to all the details of R & L

Air, and (2) decedent was the only other individual performing

services besides the pilot who works for the leasing company.

These assumptions are incorrect.     R & L Air hired Pinnacle Air

Group to manage its airplanes and paid monthly fees for these

management services.     Pavlicek testified as to the services that

Pinnacle Air Group provided R & L Air, including ensuring that

the airplanes were fit to fly and that there were qualified

pilots available.     Petitioners have not provided any evidence

that McCrimlisk was corrected regarding the business operations

of R & L Air in 2004.     We therefore conclude that petitioners did

not act reasonably in relying on McCrimlisk’s advice or on the

KPMG letter because they were not based on accurate information.

Petitioners are therefore liable for the accuracy-related

penalties under section 6662.
                             - 42 -

     To allow for further proceedings to determine decedent’s

basis in R & L Air and recomputation of the deficiencies and

penalties in accordance with this opinion,


                                      An appropriate order will

                                be issued.
