# UNITED STATES TAX COURT

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Ac00ffafe376a9518

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

s?I

0
T.C. Memo. 2005-188

UNITED STATES TAX COURT

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

Docket No. 5595-02.

Filed July 27, 2005.

William M. Weintraub and Brian Wright, for petitioners.
Jack H. Klinghoffer, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

KROUPA, Judge:

Respondent determined deficiencies of

$257,242 for 1992, $774,708 for 1993, $1,409,667 for 1994 and
$150,837 for 1997 in petitioners' Federal income taxes.1

The

parties have settled all issues except whether petitioners
operated their jet charter activity for profit from 1993 through
¹All section references are to the Internal Revenue Code for
the relevant years unless otherwise indicated, and all Rule
references are to the Tax Court Rules of Practice and Procedure.

SERVED JUL 2 7 2005:

C

-21997 (the relevant years).2

We hold that petitioners operated

their jet charter activity for profit during each of the relevant
years.
FINDINGS OF FACT

Some of the facts have been stipulated and are so found.
The stipulation of facts and the accompanying exhibits are

incorporated by this reference.

Petitioner Leonard Rabinowitz

(Mr. Rabinowitz) resided in Beverly Hills, California, and
petitioner M. Carole Rabinowitz, also known as Carole Little (Ms.
Little) resided in Los Angeles, California, at the time

petitioners filed the petition in this case.
Petitioners
Mr. Rabinowitz began his sales career with a job at his

father's company while still in high school selling paint,
plastic, and tools to automotive repair shops.

After high

school, he continued working for his father's company and then

2The "relevant years" in this case include 1995 and 1996,
which are not years for which respondent issued a notice of
deficiency. To determine the correct tax liability for 1992 and
1993, however, the correct net operating loss carrybacks must be
computed, which requires us to determine whether petitioners
operated the jet charter activity for profit in 1995 and 1996.
Sec. 6214(b) obligates us to consider facts for other years as
may be necessary to redetermine the amount of the deficiencies
for the deficiency years.
Sec. 6214(b); Hill v. Commissioner, 95
T.C. 437, 439-440 (1990). Therefore, we consider whether
petitioners operated the jet charter activity for profit in 1995
and 1996 solely to permit the parties to compute the correct net
operating loss carrybacks for 1992 and 1993 pursuant to Rule 155.
See sec. 6214(b); Hill v. Commissioner, supra at 439-440.
Although respondent issued a notice of deficiency to petitioners
for 1992, respondent did not assert in the notice of deficiency
that petitioners did not operate the jet charter activity for
profit in that year. We therefore do not consider whether the
activity was operated for profit during 1992.

-3for another enterprise, selling similar items.

Later, he

accepted a position selling women's apparel wholesale for a
clothing manufacturer.

Mr. Rabinowitz developed his sales skills

further in positions with several other women's apparel companies
before accepting a sales and merchandising position with Jasper
Brothers of California (Jasper Brothers).

At Jasper Brothers,

Mr. Rabinowitz met Ms. Little, a designer at the .company.
Ms. Little was always interested in fashion and hoped to
make it a career.

After brief stints at junior college and

studying English literature at UCLA, she began looking for
fashion courses.

She began studying at LA Trade Tech in the

early 1970s after discovering there were no design-specific
institutions.

She originally intended to take just one course at

LA Trade Tech but loved her fashion studies so much that she
stayed for 2 years and graduated.

Ms. Little then accepted a

position designing women's apparel at Jasper Brothers.

There,

she met Mr. Rabinowitz, and they began a personal relationship.3
Their personal and professional relationship would last over 30
years, dramatically change their lives, and alter the way in
which women's apparel was designed and marketed.

3Petitioners married each other in late 1978 or early 1979
and divorced in 1995 or 1996 although the record does not reflect
the exact date of either their marriage or divorce.
Petitioners
have maintained their professional relationship and at the time
of trial owned Studio CL, a women's apparel design and import
firm.

_4_
Petitioners' Fashion Company
At Jasper Brothers, Mr. Rabinowitz saw Ms. Little's design
talent and suggested they go into business together, so that Ms.
Little could design under her own name.

Ms. Little was excited

by the opportunity to design her own line and generally
fascinated with fashion and the industry.

She accepted Mr.

Rabinowitz's plan, although she admittedly did not know much
about going into business at the time.

The couple started

California Fashion Industries (CFI) in 1974.4
Petitioners positioned CFI in the higher end of the women's
apparel market.

CFI designed women's apparel, arranged for its

manufacture, and distributed the apparel to higher end department
and specialty stores.

CFI had a unique angle on the market by

targeting its apparel to the needs and preferences of the baby
boomer woman.

This meant that Ms. Little's designs gradually

evolved over the years so that the apparel would continue to be
relevant to the baby boomer woman as she aged from her
midtwenties to her thirties and forties and beyond.

This

strategy of building a brand that customers knew and could trust
generated considerable loyalty among CFI's customers in
succeeding years.
While Ms. Little was responsible for the creative end of the

business, creating both clothing designs and artwork, Mr.
Rabinowitz put his sales and merchandising talents to use selling

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

-5the apparel to higher end department stores.

This took a great

deal of work in developing contacts and relationships with
department store executives.
effort in this respect.

Mr. Rabinowitz made a tremendous

He even learned to ski so that he could

spend more face time with the chairman of CFI's largest
department store customer, who had repeatedly invited Mr.
Rabinowitz to join him on the ski, slopes.

Mr. Rabinowitz thought

that skiing with the chairman might be a good way to develop this
important relationship.
Petitioners' Jet Charter Activity

By 1984, CFI had grown to $24 million in annual sales, and
petitioners were looking for new ways to expand their business.
Petitioners realized there was great potential in marketing to
Middle America and not limiting their sales calls to the east and
west coasts of the United States.

It was very difficult for Mr.

Rabinowitz to make sales calls to companies located in the middle

of the country, however, if he traveled on commercial airlines
because of his numerous other responsibilities and time
commitments in running CFI.

For example, commercial airline

travel did not provide much flexibility in travel arrangements
and often required Mr. Rabinowitz to stay overnight.

An

overnight stay on the road was an extraordinary time commitment
for a busy executive like Mr. Rabinowitz and not feasible on an
ongoing basis.

-6Petitioners also had encountered difficulties transporting
clothing samples and other items to trade shows and events across
the country.

Oftentimes, things got lost or were delayed, which

caused petitioners to miss important opportunities to market
their clothing line to potential buyers.
Mr. Rabinowitz was aware of the advantages of chartering
private aircraft.

He had chartered a private aircraft

occasionally to attend board meetings for a public company in San
Jose, California.

Petitioners began to charter a jet owned by a

third party to use in CFI's business when needed.

Difficulties

with the availability and reliability of those jets, however,
caused petitioners to consider another solution.
Petitioners decided to buy a jet and offer it for charter.
Petitioners thought they could make money in this activity, do it

better than other aircraft charter companies, and at the same
time provide a safe aircraft for CFI.
Petitioners purchased a Mitsubishi Diamond 1-A aircraft (the
Mitsubishi) and started Beverly Hills Jet (BHJ), their jet
charter activity, in 1985.

Petitioners' business advisers had

recommended that petitioners not cause CFI to purchase the

aircraft to avoid having to list the jet on CFI's balance sheet.
The goal was to ensure that the jet was not included in a
computation of the ratio of CFI's available capital to fixed
assets.

Instead, petitioners purchased the Mitsubishi

individually rather than through CFI.

-7The impact on CFI was immediate.

By the early 1990s, CFI's

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

Mr. Rabinowitz

attributed a significant portion of the sales growth to CFI's use
of chartered aircraft.

Using a private jet enabled petitioners

to visit department store buyers in cities that could not be
reached via commercial airlines.

In addition, petitioners were

able to open a flagship Carole Little store in Aspen, Colorado,
to showcase their brand and their products.3

This store was one

of only one or two that carried the full line of Carole Little
merchandise.

The store also served as a product testing ground,

where CFI could test particular items before distributing them
nationally.

With the jet, they could quickly visit this store to

check on or deliver merchandise, examine the store's appearance,
and discuss any issues regarding sales of the clothing with the
store staff.

They learned what clothing sold and, more

importantly, why certain clothing did not sell.

Also, the arrival of Mr. Rabinowitz on a private jet to make
a sales call distinguished him from other salespeople in his
buyers' eyes and allowed Mr. Rabinowitz to call on high-ranking
executives to whom he would not otherwise have access.

Ms.

Little was able to make more personal appearances to market her

brand.

In addition, because she could bring garments on the jet

with her and add finishing touches, Ms. Little could devote more
time to creating new designs rather than waiting for commercial
airlines.

The jet also cut down on the risk of loss or delay of

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

-8Ms. Little's valuable original designs because petitioners could

bring them on the jet.

The garments never were out of their

sight.
CFI became a very lucrative business for petitioners during
the relevant years.

Petitioners together earned wages from CFI

of $840,000 to $5.5 million during each of the years in issue.
Modifications to the Jet Charter Activity
After a few years, petitioners became concerned that the

Mitsubishi was not generating sufficient revenue.

Petitioners

analyzed both the cost side and the revenue side of their jet

charter activity.

On the cost side, petitioners noted that the

Mitsubishi incurred high fixed costs that generally would not

vary according to the size of the aircraft, such as a hangar,
pilots, and other full-time employees.

On the revenue side,

petitioners recognized that the Mitsubishi did not generate many
charters.

The Mitsubishi was a smaller aircraft and had a

limited range.

It could travel from the coast only to about

midcountry and then needed to be refueled.

Although the time it

took to refuel was minimal, charter customers preferred to travel
nonstop and generally preferred to charter a jet that did not
require refueling to travel across the country.

Mr. Rabinowitz

also believed that the Mitsubishi was not comfortable for
passengers and understood the marketplace was generally
interested in chartering larger aircraft.

Therefore, petitioners

were faced with high fixed costs to own and operate the
Mitsubishi and low demand to charter such a small jet.

_9_
Petitioners explored the idea of purchasing a larger, longer

range aircraft that they could charter for a higher fee per hour.
In 1989, petitioners purchased a Dassault Falcon 200 jet (the
Falcon) for $5.2 million.

Petitioners paid part of the purchase

price of the Falcon by trading in the Mitsubishi.

Mr. Rabinowitz

thought they were getting a good deal on the Falcon because the

seller, US West Communications, was anxious to purchase a
different aircraft.
Initial Management of the Jet Charter Activity

Petitioners initially engaged an outside management firm,
Raleigh Enterprises, to manage the jet charter activity for the
first 6 to 8 months.

To maximize the charter business,

petitioners obtained an operating certificate for aircraft

chartered to the general public (a rule 135 certificate) pursuant
to the requirements of the Federal Aviation Administration (FAA).
Raleigh Enterprises assisted with the process of obtaining the
rule 135 certificate and also maintained the jet, solicited
charter business, and generally managed the aircraft.

Mr.

Rabinowitz decided to handle these matters himself within a year

of purchasing the Mitsubishi.
Compliance With FAA Rules

Petitioners maintained a rule 135 certificate for their jet
because they wanted to make it available for third-party
charters.

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

The

FAA requires a rule 135 certificate for an enterprise to charter
an aircraft for profit.

An enterprise that cannot charter its

-10aircraft for profit (such as, for example, a jet owned by an
individual and used only by that individual and family) would
obtain a certificate under FAA rule 91, and a scheduled airline
would obtain a certificate under FAA rule 121.

The FAA requirements to maintain a rule 135 certificate are
more onerous than the FAA requirements for aircraft that are not
chartered to the general public.

For example, the FAA requires

pilots to be trained to certain standards and also requires
higher maintenance standards than those specified for jets not
operated with a rule 135 certificate.

The FAA also requires both

a maintenance manual and an operations manual to maintain a rule
135 certificate, and Federal excise tax must be charged on all
flights.

Mr. Rabinowitz estimated that it cost approximately

several hundred thousand dollars per year to maintain a rule 135
certificate pursuant to the FAA standards, absent the excise tax.
Marketing of the Jet Charter Activity

Petitioners marketed their jet charter activity in several
ways.

Mr. Rabinowitz understood from the industry that the most

likely charter customers were individuals or companies that
themselves owned private aircraft but whose jets were unavailable
to them for various reasons.

Therefore, Mr. Rabinowitz contacted

other aircraft owners to inform them that he had the Falcon and a

rule 135 certificate, and that he would like their business.

Mr.

Rabinowitz also asked the chief pilot to solicit business by
contacting other flight departments and pitching BHJ when he was
not flying the Falcon.

Mr. Rabinowitz paid the chief pilot a

-11commission on flights generated.

Mr. Rabinowitz developed a

marketing campaign including brochures and flyers to solicit
charter business.

Petitioners also advertised in The Air Charter

Guide, a trade publication.
Setting the Charter Price

Mr. Rabinowitz carefully assessed the aircraft charter
market to determine the price petitioners should charge for
third-party charters of the Falcon.

He ascertained what other

owners of similar jets charged and charged a similar rate, which

was between $1,950 and $2,250 per hour.

Mr. Rabinowitz also

ascertained rates other charter businesses charged for a large
number of hours per year and decided to charge CFI a type of bulk

discount of $1,800 per hour.

Prices in the industry stayed

fairly stagnant during the relevant years.

Petitioners therefore

did not change the price they charged CFI during this period.
Employees of the Jet Charter Activity
Petitioners hired several full-time employees for BHJ.

The

employees included a chief pilot, a co-captain, and an FAA
certified aircraft and power mechanic.

Also, two bookkeepers

together worked approximately full time for BHJ from 1989, when
petitioners acquired the Falcon.

Mr. Rabinowitz himself spent

approximately 30 hours per week on his BHJ activities.

Mr.

Rabinowitz assisted in preparing books and records, approving
flight logs and generating invoices, managing the staff, payroll
and compensation policies, engaging in marketing activities,
serving as liaison with the FAA, and generally managing the

-12aircraft.

In addition, Mr. Rabinowitz also spent at least 50

hours per week on his work for CFI.
Personal Use of the Jet
Petitioners did use the Falcon for some personal travel, but
not very often.

Each time petitioners used the Falcon for

personal travel, BHJ billed them and they paid BHJ from their
personal checking account.

Petitioners' accountants verified

that an invoice was prepared for personal travel and Mr.
Rabinowitz paid the invoices.

Petitioners' daughter, Jennifer

Heft, who was a merchandising employee of CFI, also made trips in
the Falcon to meet with Ms. Little concerning various CFI

matters.

BHJ billed CFI, and CFI paid BHJ, for each of Ms.

Heft's trips.
Arrangement With Verna Harrah

Verna Harrah (Ms. Harrah), a woman Mr. Rabinowitz was dating
from 1990 through 1995 while he was separated from Ms. Little,
and who was involved in a movie business with Mr. Rabinowitz,
also owned a jet, which cost approximately four times as much as

petitioners' jet.

Ms. Harrah's jet had nicer amenities and could

fly to Europe and South America.

Petitioners agreed with Ms.

Harrah that each would look to the other first when they needed
to use an aircraft and their own aircraft was busy, and that the
rate for the use of the other's aircraft would be the direct
costs of operation only.

Direct costs of operation were those

costs related to the flying time and included a specified amount
for wear and tear on the aircraft,

fuel, and engine maintenance.

-13Direct costs of operation did not include costs fixed and paid
annually, such as insurance, the cost for the hangar, and the
salaries of the pilots and mechanics.

Petitioners therefore

charged Ms. Harrah $1,200 per hour for the use of the Falcon
based on the direct costs of operation, and Ms. Harrah charged
petitioners approximately $1,300 to $1,400 per hour for the use
of her jet based on the direct costs of operation.

Petitioners made sure, however, that Ms. Harrah's request
for use of the Falcon had least priority such that, if a thirdparty charter customer or CFI had requested the use of the
Falcon, Ms. Harrah would not be able to use it.

Petitioners

believed the arrangement was advantageous to them because the
agreement enabled them to use a jet worth about four times as

much as their own for only about $100 to $200 more per hour.
Petitioners could use Ms. Harrah's jet for personal travel or

could accommodate charter customers on Ms. Harrah's jet when the
Falcon was not available.
Success of the Jet Charter Activity
Petitioners believed BHJ would be able to generate a profit
if the jet had enough hours of flying and if the activity had the
right mix of charters to CFI, charters to third parties, and
charters to Ms. Harrah pur.suant to their agreement.
CFI was treated like any other customer and did not have
priority over using the Falcon.

Petitioners noted that if a

third-party customer wished to book the jet (which would be at a
higher rate because of CFI's bulk discount), petitioners would

-14schedule CFI's trip around the third-party customer's trip.

In

that event, CFI could also use Ms. Harrah's jet at the agreed
rate.
Petitioners enjoyed moderate success obtaining third-party
customers for BHJ.

John Paul Mitchell, Tom Hanks, Don Henley,

Jean Claude Van Damme, and Kenny G all occasionally chartered the

Falcon.

Petitioners also had several key customers who regularly

booked travel on the Falcon.

Petitioners encountered some difficulties with the Falcon,
however.

The U.S. Coast Guard had purchased approximately 80

percent of all the Dassault Falcon 200s sold in the United States
and put them into service flying coastal missions at a low
altitude and over the coastline.

The U.S. Coast Guard reported

problems with the engine seals as well as engine shutdowns in the
aircraft.

In response to these difficulties, the FAA required

increased maintenance and service of the engines on all Dassault
Falcon 200s, including the Falcon petitioners owned.

The

negative publicity surrounding the engines impeded petitioners'
charter sales and devalued petitioners' Falcon.

Petitioners considered selling the Falcon, but they decided
to keep the Falcon and continue soliciting third-party charters
because they were concerned that the negative publicity would
depress the sale price.

Mr. Rabinowitz anticipated a greater

return from chartering the aircraft in the meantime than from
selling it at a depressed value.

-15Petitioners suffered a net loss for each year from 1985
through 1997 attributable to their jet charter activity.

During

the relevant years, BHJ had the following gross income, net loss
and net cash flow:

.

Year

Gross Income

Net Income
(Loss)

Net Cash Flow

1993

$580,340

($743,485)

($547,984)

1994

545,941

(685,719)

(485,423)

1995

447,524

(775,618)

(574,585)

1996

527,298

(521,076)

(397,924)

1997

273,704

(214,126)

(208,938)

Repairs and maintenance were the major expenses during the
relevant years.

Mr. Rabinowitz was constantly trying to improve the jet
charter activity and remained focused on increasing the bottom

line of the combined entities.

Although BHJ did not generate a

profit, Mr. Rabinowitz was pleased with the jet charter activity
because of the benefits to CFI.

Mr. Rabinowitz continued trying

to improve BHJ's operations as well.
Sale of CFI and Termination of the Jet Charter Activity
In April 1997, petitioners decided to sell the·Falcon for
$4.35 million and terminated their jet charter activity.
Petitioners also decided to sell CFI.

They ultimately sold it to

a larger company in August 2000 in exchange for stock.
Deductions at Issue
Petitioners filed joint tax returns for each of the relevant
years and deducted losses attributable to the jet charter

-16activity.

Respondent disallowed petitioners' losses relating to

th'e jet charter activity for 1993, 1994, and 1997 in a notice of
deficiency dated November 15, 2001, determining that, among other
issues, petitioners did not engage in their jet charter activity
for profit under section 183.

Petitioners timely filed a

petition with this Court seeking redetermination of the
disallowed losses and asserting that they engaged in the jet
charter activity with the intent of making a profit.
OPINION
A.

Whether Petitioners Operated BHJ for Profit

We are asked to decide whether petitioners operated BHJ for
profit during the relevant years within the meaning of section
183.

Section 183(a) provides generally that if an individual

engages in an activity and "if such activity is not engaged in
for profit, no deduction attributable to such activity shall be
allowed under this chapter except as provided in this section."
Deductions that would be allowable without regard to whether the

activity is engaged in for profit shall be allowed under section
183(b)(1), and deductions that would be allowable only if the

activity is engaged in for profit shall be allowed under section
183(b)(2), but only to the extent that the gross income from the
activity exceeds the deductions allowable under section

183(b)(1).
We follow the Court of Appeals opinion squarely on point
when appeal from our decision would lie to that court absent
stipulation by the parties to the contrary.
6

Golsen v.

-17Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.

1971).

Because.petitioners reside in the Ninth Circuit,

petitioners have the burden of proving that they conducted their
activities with the primary, predominant or principal purpose of
realizing an economic profit independent of tax savings.

See

Wolf v. Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), affg. T.C.
Memo. 1991-212; Polakof v. Commissioner, 820 F.2d 321, 323 (9th
Cir. 1987), affg. T.C. Memo. 1985-197; Indep. Elec. Supply, Inc.
v. Commissioner, 781 F.2d 724, 726 (9th Cir. 1986), affg. Lahr v.
Commissioner, T.C. Memo. 1984-472.

Petitioners do not contend that section 7491(a) applies in
this case to shift the burden of proof to respondent, nor have
they established they met the requirements of section
7491(a)(2).6

Therefore, the burden of proof remains with

petitioners.

Whether a taxpayer has the primary, predominant or principal
purpose of realizing an economic profit independent of tax
savings is determined on the basis of all surrounding facts and
circumstances.

Polakof v. Commissioner, supra at 324; Indep.

Elec. Supply, Inc. v. Commissioner, supra at 727; Dreicer v.
Commissioner, 78 T.C.

642,

645 (1982), affd. without published

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

Income

While a taxpayer's expectation of profit need not be

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

-18reasonable, there must be a good faith objective of making a

profit.

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

1.183-2(a), Income Tax Regs.

We give greater weight to objective

facts than to a taxpayer's statements of intent.

Dreicer v.

Commissioner, supra at 645; sec. 1.183-2(a), Income Tax Regs.
Before we address whether petitioners had the primary,

predominant or principal purpose of realizing an economic profit
independent of tax savings, we first must address whether CFI and
BHJ may be treated as one activity.

Respondent argues that we

may not aggregate the two activities to determine the profit
objective.
B.

We agree.

Whether CFI and BHJ May Be Treated as One Activity for
Purposes of Section 183

Multiple activities of a taxpayer may be treated as one

activity if the activities are sufficiently interconnected.
1.183-1(d)(1), Income Tax Regs.

Sec.

In making this determination,

the most important factors to be considered include the degree of

organizational and economic interrelationship of the
undertakings, the business purpose served by carrying on the
undertakings separately or together, and the similarity of the
undertakings.

Id

The Commissioner generally accepts a

taxpayer's characterization of two or more undertakings as one
activity unless the characterization is artificial or
unreasonable.

Id.

We have considered those and other factors in determining
whether the taxpayer's characterization is unreasonable.
include:

(a) Whether the undertakings share a close

These

-19organizational and economic relationship;

(b) whether the·

undertakings are conducted at the same place;

(c) whether the

undertakings were part of a taxpayer's efforts to find sources of
revenue from his or her land;

(d) whether the undertakings were

formed as separate businesses;

(e) whether one undertaking

benefited from the other;

(f) whether the taxpayer used one

undertaking to advertise the other;

undertakings shared management;

(g) the degree to which the

(h) the degree to which one

caretaker oversaw the assets of both undertakings;

(i) whether

the taxpayers used the same accountant for the undertakings; and

(j) the degree to which the undertakings shared books and
records.

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

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

We find that it is inappropriate to treat CFI and BHJ as one
activity for purposes of applying section 183.

CFI and BHJ did

not share a close organizational or economic relationship.

CFI

was an S corporation, while BHJ was a sole proprietorship.
Although the ownership of CFI and BHJ was the same and Mr.
Rabinowitz managed both CFI and BHJ, there was no other
organizational relationship between CFI and BHJ.

CFI and BHJ

also did not have a close economic relationship.

CFI was a

charter customer of BHJ, as were numerous other third parties.
CFI and BHJ also were not similar activities.

CFI was

engaged in the design and distribution of women's apparel, while
BHJ was a jet charter service.

Petitioners had a business

purpose for treating CFI and BHJ as separate entities.

-20Petitioners were concerned about the presence of a jet on CFI's
balance sheet.

Petitioners ensured the activities were treated

separately as long as they existed.

Accordingly, petitioners

caused BHJ to invoice CFI for, and CFI to pay for, each of CFI's
charter flights on the Falcon.
After reviewing the above factors and the facts and

circumstances of this case, we find it is inappropriate to treat
BHJ and CFI as one activity for purposes of applying the section
183 rules.

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

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

Accordingly, we shall

examine whether petitioners engaged in the jet charter activity
for profit without consideration of whether petitioners engaged

in CFI for profit.
C.

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

Whether Petitioners Engaged in BHJ for Profit

In determining whether petitioners engaged in the jet
charter activity for profit, we structure our analysis around
nine nonexclusive factors.

The nine factors are:

(1) The manner in which the taxpayer

carries on the activity;

or her advisers;

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

(2) the expertise of the taxpayer or his

(3) the time and effort expended by the taxpayer

in carrying on the activity;

(4) the expectation that the assets

used in the activity may appreciate in value;

(5) the success of

the taxpayer in carrying on other similar or dissimilar
activities;

(6) the taxpayer's history of income or loss with

respect to the activity;
any, which are earned;

(7) the amount of occasional profits, if

(8) the financial status of the taxpayer;

-21and (9) whether elements of personal pleasure or recreation are
involved.

Id.

No factor or set of factors is controlling, nor is the

existence of a majority of factors favoring or disfavoring a
profit objective necessarily controlling.

Hendricks v.

Commissioner, 32 F.3d 94, 98 (4th Cir. 1994), affg. T.C. Memo.
1993-396; Brannen v. Commissioner, 722 F.2d 695, 704 (11th Cir.
1984), affg. 78 T.C. 471 (1982); sec. 1.183-2(b), Income Tax
Regs.

The individual facts and circumstances of each case are

the primary test.

Keanini v. Commissioner, supra; Allen v.

Commissioner, supra at 34; sec. 1.183-2(b), Income Tax Regs.
Petitioners argue that, in determining whether they had a

primary, predominant or principal purpose and intent of realizing
an economic profit from the jet charter activity independent of
tax savings, we should take into account the increased

profitability of CFI due to using petitioners' jet charter

service.

Petitioners have proved, however, that they operated

the jet charter activity for profit independent of its effect on
the profitability of CFI.

Therefore, we do not address this

issue.
D.

Application of the Factors
1.

The Manner in Which the Taxpayer Carried On the
Activity

We begin by examining the manner in which petitioners
carried on the jet charter activity.

The fact that a taxpayer

carrles on an activity in a businesslike manner may indicate a
profit objective.

Sec. 1.183-2(b)(1),

Income Tax Regs.

In

-22determining whether a taxpayer conducted an activity in a
businesslike manner, we consider whether the taxpayer maintained
complete and accurate books and records, whether the activity was
conducted in a manner substantially similar to comparable
businesses that are profitable, and whether changes were
attempted to earn a profit.

Engdahl v. Commissioner, 72 T.C.

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

Petitioners carried on the jet charter activity in a
businesslike manner during the relevant years.

Petitioners

sought and obtained a rule 135 certificate from the FAA that
enabled them to operate BHJ as a third-party charter service.

The FAA required petitioners to keep a maintenance manual and an
operations manual and also required higher maintenance and pilot
training standards to maintain a rule 135 certificate.

The FAA

did not impose these requirements on enterprises not maintaining
a rule .135 certificate.

The FAA also required petitioners to

charge a Federal excise tax on all flights.

Petitioners kept

complete and accurate books and records for the jet charter
activity and employed two bookkeepers approximately full time in
the aggregate on this activity during the relevant years.
Petitioners advertised the jet charter activity through
various means.

Mr. Rabinowitz solicited charter business from

owners of other aircraft.
advertisements

Petitioners created flyers and

(including an ad in The Air Charter Guide, a trade

publication), and paid the chief pilot on commission to solicit
charters.

-23Petitioners charged varying charter rates to different
customers.

Petitioners charged third parties a rate per hour

consistent with the price to charter other, similar jets.
Petitioners charged CFI a slightly lower rate, which was the
market rate when a customer booked a large number of flight-hours
per year.

These competitive rates were based on an assessment of

the rates others charged to charter similar jets.

Petitioners also entered into the arrangement with Ms.
Harrah to accommodate each other on their respective jets if
their own were unavailable.

The arrangement with Ms. Harrah

enabled petitioners to provide services to their third-party
charter customers on a larger jet in the event the Falcon was
unavailable and also to use a different jet for personal travel

if the Falcon was reserved for paying customers.

In the event

petitioners used the Falcon for personal travel, BHJ invoiced
petitioners for the travel and petitioners paid for it.

These

sums were included in BHJ's gross receipts.
Petitioners also made changes to the jet charter activity to
try to make it profitable.

Petitioners realized that the initial

jet, the Mitsubishi, was not ideal for third-party charters.

The

Mitsubishi was not able to fly across the country without

stopping to refuel and was uncomfortable for passengers.
Petitioners decided to trade in the Mitsubishi for the Falcon,
which did not have these drawbacks, in the hope that the Falcon
would be more attractive to customers and increase petitioners'
third-party charter business.

-24-

The rule 135 certificate and required documentation, books
and records, arm's length rates charged to charter customers,
extensive advertising, and the changes petitioners implemented
all indicate that petitioners operated the jet charter activity
in a businesslike manner and support petitioners' contention that
they carried on the jet charter activity for profit.
2.

The Expertise of the Taxpayers or Their Advisers

We next consider petitioners' expertise (or the expertise of
their advisers) in jet charter activities.

Preparing for the

activity by extensive study of its accepted business, economic
and scientific practices and consulting with experts in these
matters may indicate that a taxp.ayer has a profit objective when
the taxpayer follows that advice.

Sec. 1.183-2(b)(2), Income Tax

Regs.

When petitioners began the jet charter activity, petitioners
initially retained an outside management firm to manage the jet
charter activity for the first 6 to 8 months until Mr. Rabinowitz
had some experience in the business and could do it himself.

Petitioners also hired several trained staff members to work for

the jet charter activity throughout the time they were engaged in
the activity, including a captain, a co-captain, a mechanic, and
two bookkeepers.

Mr. Rabinowitz also took pains to ensure. his

decisions were educated decisions about the jet charter activity.
For example, he personally solicited owners of other aircraft as
charter customers because he had learned from the industry that
these were often the best charter customers.

-25Both petitioners also have considerable business knowledge
and skills not directly related to the jet charter industry.
Petitioners built CFI into an organization that had hundreds of
millions of dollars in sales at its peak.

The skills required to

build such a successfúl business undoubtedly assisted Mr.
Rabinowitz in his work for the jet charter activity.

In

addition, although Mr. Rabinowitz may not initially have been
familiar with the intricacies of the jet charter industry, he
knew about marketing, employee relations and other essential
tools necessary to run a business, all of which he put to use
operating the jet charter activity.
In sum, petitioners hired skilled staff members to assist in

operating the jet charter activity.

Mr. Rabinowitz has also

demonstrated that he has considerable business knowledge and
undertook efforts to become familiar with industry practice.

These facts support a conclusion that petitioners operated the
jet charter activity for profit.
3.

The Time and Effort Expended by the Taxpayer in
Carrying On the Activity

We next consider the time and effort petitioners expended on
the jet charter activity.

A taxpayer's devotion of much time and

effort to conducting an activity, particularly if the activity

does not have substantial personal or recreational aspects, may
indicate an intention to derive a profit.
Income Tax Regs.

Sec. 1.183-2(b) (3),

The fact that a taxpayer devotes a limited

amount of time to an activity does not necessarily indicate a

-26lack of profit motive where the taxpayer employs competent and
qualified persons to carry on the activity.

Id.

Mr. Rabinowitz spent approximately 30 hours per week on the
jet charter activity during the relevant years.

This time was in

addition to the approximately 50 hours per week Mr. Rabinowitz
spent on CFI's business.

Mr. Rabinowitz was involved in every

aspect of operating the jet charter business, from approving
flight logs, generating and approving invoices, marketing the
charter service, addressing employee and compensation matters,
and generally managing the aircraft.

Petitioners also hired

three full-time employees to work for the jet charter activity
who included a chief pilot, a co-captain, and a mechanic.

The

two bookkeepers also together spent approximately full time on
the jet charter activity.

Taken together, Mr. Rabinowitz and BHJ's employees spent a
considerable amount of time and effort on the jet charter
activity during the relevant years.

That Mr. Rabinowitz spent so

much time on the jet charter activity in addition to his
considerable responsibilities for CFI indicates that he did not
take the jet charter activity lightly.

He made a large effort on

the jet charter activity in addition to his numerous
responsibilities for CFI.

These facts support petitioners'

contention that they operated the jet charter activity for
profit.

-274.

The Expectation That the Assets Used in the Activity
May Appreciate in Value

We next examine the expectation that the assets used in the
jet charter activity may appreciate in value.

A taxpayer may

intend, despite the lack of profit from current operations, that
an overall profit will result when appreciation in the value of
assets used in the activity is realized.

Bessenvey v.

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

(2d

Cir. 1967); sec. 1.183-2(b)(4), Income Tax Regs.
Neither petitioner testified that he or she expected the

Falcon to appreciate in value, and, in fact, petitioners
ultimately sold the Falcon for less than the price at which they
had purchased it.

Although Mr. Rabinowitz did suggest that the

negative publicity regarding the safety of the Falcon depressed

the value of the aircraft, petitioners did not indicate that they
expected the Falcon to appreciate in value, nor that they

considered the possibility that the jet might appreciate in value
when they decided to begin the jet charter activity.

This factor

therefore does not support petitioners' contention that they
operated the jet charter activity for profit.
5.

The Success of the Taxpayer in Carrying On Other
Similar or Dissimilar Activities

We next examine the success of petitioners in carrying on
other similar or dissimilar activities.

If a taxpayer has

previously engaged in similar activities and made them
profitable, this success may show that the taxpayer has a profit
objective, even though the current activity is presently

-28unprofitable.

Sec. 1.183-2(b)(5), Income Tax Regs.

A taxpayer's

success in other, unrelated activities also may indicate a profit
objective.

See Daugherty v. Commissioner, T.C. Memo. 1983-lt 3

(taxpayer's diligence, initiative, foresight, and other qualities
that generally lead to success in other business activities
indicate taxpayer had a profit motive for activity at issue).
Petitioners are both extremely successful individuals.
Petitioners grew CFI, the company they founded, into an
organization with over $300 million in sales at its peak.

As

majority owners of CFI, petitioners were responsible for

overseeing every aspect of the business, including marketing,
design, coordinating production, employee relations, and numerous
other activities.

Petitioners also have been engaged in several

other businesses.

Fo.r example, Mr. Rabinowitz was involved in a

movie business with Ms. Harrah.

At the time of trial,

petitioners co-owned a women's apparel design and import firm
called Studio CL.

The fact that petitioners grew CFI into such a

large organization and have considerable experience in various
business endeavors is evidence of petitioners' ample business
experience and skills they brought to their jet charter activity.
See id.

This factor favors finding petitioners operated the jet

charter activity for profit.
6.

The Taxpayer's History of Income or Loss With Respect
to the Activity

We next examine petitioners' history of income or loss with
respect to the jet charter activity.

A history of substantial

losses may indicate that the taxpayer did not conduct the

-29activity for profit.

Golanty v. Commissioner, 72 T.C. 411, 427

(1979), affd. without published opinion 647 F.2d 170 (9th Cir.
1981); sec. 1.183-2(b)(6), Income Tax Regs.

Losses during the

initial or startup stage of an activity do not necessarily
indicate, however, that the taxpayer did not conduct the activity
for profit, but losses that continue to be sustained beyond the
period that customarily is necessary to bring the operation to
profitable status may indicate the taxpayer did not engage in the

activity for profit.

Engdahl v. Commissioner, 72 T.C. at 668;

sec. 1.183-2(b) (6), Income Tax Regs.

Losses due to unforeseen

circumstances beyond the taxpayer's control do not negate that

the taxpayer engaged in the activity for profit.
2(b)(6),

Sec. 1.183-

Income Tax Regs.

Petitioners sustained losses from the jet charter activity
each year from 1985 through 1997.

Petitioners' losses during the

early years of their operation could be attributed to a startup
phase of the activity, but the losses continued for 12 years.
Petitioners' losses with respect to the jet charter activity
generally decreased, however, almost every year during the
relevant years.

Further, petitioners' net cash flow with respect

to the jet charter activity, although negative for each of the

relevant years, showed a general trend of increasing.

Mr.

Rabinowitz also testified that the unforeseen safety problems
with the Falcon during the relevant years and the resulting
negative publicity hampered BHJ's ability to obtain third-party

-30charters for the jet and also required additional safety checks,
which increased BHJ's expenses.

Thus, although petitioners did sustain large losses during
each of the relevant years and in fact through the duration of
the activity, the unforeseen circumstances were a factor in the

losses petitioners encountered in the jet charter activity.
Also, several indications showed that the prospects of the jet
charter activity were improving over time.

These circumstances

partially mitigate petitioners' long history of losses from the
jet charter activity.
7.

The Amount of Occasional Profits, If Any, Which Are
Earned

We next consider the amount of occasional profits, if any,
petitioners earned from the jet charter activity.

Occasional

profits the taxpayer earned from the activity, in relation to the

amount of losses incurred, the amount of the taxpayer's
investment, and the value of the assets used in the activity

provide useful criteria in determining the taxpayer's intent.
Sec. 1.183-2(b)(7), Income Tax Regs.

A practical possibility

that a taxpayer could earn enough money in a year to exceed
expenses also can indicate a profit objective.

Bolt v.

Commissioner, 50 T.C. 1007, 1014 (1968).
Petitioners incurred losses from the jet charter activity
for each year beginning with 1985, when they began the activity,
through 1997, when they ended the activity by selling the Falcon.
As discussed above, there was a general trend of increasing net
cash flow and decreasing losses from the jet charter activity

-31through the relevant years, even with the unforeseen safety

problems.
Notwithstanding this trend, it is uncertain whether

petitioners ever would have earned a profit from the jet charter
activity because of the significant fixed costs involved.

This

factor does not support petitioners' contention that they engaged
in the jet charter activity for profit.
8.

The Financial Status of the Taxpayer

We next examine petitioners' financial status.

If a

taxpayer does not have substantial income or capital from sources

other than the activity in question, it may indicate that the
taxpayer engages in the activity for profit.

Income Tax Regs.

Sec. 1.183-2(b)(8),

Conversely, substantial income from sources

other than the activity, especially if the losses generate large

tax benefits, may indicate that the taxpayer is not conducting
the activity for profit.

Id.

Taxpayers with substantial income

from other sources have a much greater tax incentive to incur
large expenditures in a hobby type of business.
Commissioner, 59 T.C. 312, 317 (1972).

Jackson v.

The fact that a taxpayer

has substantial income from other sources does not, however,
foreclose a profit motive if the facts and circumstances indicate
a taxpayer engaged in the activity for profit.
Commissioner, T.C. Memo. 1999-56.

Wheeler v.

It is just one factor.

See

id.
Petitioners had substantial income from CFI that the jet
charter losses could and did offset.

Petitioners reported

-32considerable net income during each of the relevant years.

1993 alone, petitioners reported $5.5 million in wages.

In

While

this factor is not helpful to petitioners' contention, it does
not foreclose a profit motive.
9.

See idz

Whether Elements of Personal Pleasure or Recreation Are
Involved

We next examine whether elements of personal pleasure or
recreation were involved in the activity.

The presence of

recreational or pleasurable motives in conducting an activity may
indicate that the taxpayer is not conducting the activity for
profit.

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

The fact that the

taxpayer derives personal pleasure from engaging in the activity
is not sufficient to cause the activity to be classified as not
engaged in for profit, however, if the activity is, in fact,

conducted for profit as shown by other factors.

Jackson v.

Commissioner, supra; sec. 1.183-2(b)(9), Income Tax Regs.
Petitioners did make some personal trips in the Falcon.
Petitioners and respondent do not agree on the number and value
of the trips petitioners took for personal travel versus business
travel.

The disagreement results in part from different views of

particular trips.

For example, respondent characterized certain

trips from San Diego to Los Angeles made by Jennifer Heft
(petitioners' daughter and a merchandising employee of CFI)

to

meet with Ms. Little as personal trips, while petitioners
characterized Ms. Heft's .travel as business trips.

Similarly,

respondent contended that petitioners' trips to Aspen, Colorado,
were of a personal nature because Mr. Rabinowitz skied and

-33petitioners had a second home there, while petitioners stated
that the Aspen trips were to visit their flagship Carole Little
store to deliver or collect merchandise, check on merchandise or
store appearance, and discuss CFI matters with the store staff.
In any case, petitioners paid BHJ from their personal account for
the occasional personal trips they took on the Falcon, and CFI
paid for the trips characterized as having a business purpose.
Petitioners also often used Ms. Harrah's jet for personal
travel when the Falcon was on charter or otherwise unavailable to
them.

CFI was the primary customer of the jet charter activity,

and petitioners both testified credibly as to the business
purpose and nature of the CFI trips.
We are not convinced that either petitioner was an airplane
hobbyist or particularly enjoyed air travel, but we do recognize
that petitioners derived some benefit from the ability to use a
private jet occasionally for personal purposes.

We find

petitioners' use of the Falcon and the jet charter activity to be
primarily motivated by the needs of their CFI business.

This

factor supports a conclusion that petitioners engaged in the jet
charter activity for profit.
10.

Conclusion

Mr. Rabinowitz testified that petitioners thought they could
enter the jet charter business, do it better than other charter
companies, and make money while doing it.

Petitioners used their

considerable business skills to attempt to make the business

-34-

profitable.

Petitioners set competitive rates for the jet

charter activity, advertised the jet charter activity, and
solicited business from other jet owners.

Petitioners kept

voluminous books and records and maintained the FAA certificate

required to sell charters to third parties.

Petitioners made

modifications to their business plan to attract more charter
business.

Petitioners successfully showed a general trend of

decreasing losses throughout the relevant years, despite negative
publicity and FAA-mandated additional safety requirements for
their jet.

Most importantly, we found petitioners' testimony

reliable and credible.
The nine nonexclusive factors and the facts and
circumstances of this case lead us to conclude that petitioners
engaged in the jet charter activity with the primary, predominant
and principal purpose and intent of realizing an economic profit
independent of tax savings during the relevant years.

We

therefore find that petitioners have met their burden of proving
the requisite motive for their jet charter activity.

Accordingly, we do not sustain respondent's determination in

the notice of deficiency.
To reflect the foregoing in favor of petitioners and the
concessions of the parties,
Decision will be entered
under Rule 155.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Ac00ffafe376a9518. Public record. Not legal advice.