Ronald & Susan Rosenblatt, Petitioner

RONALD,AND SUSAN ROSENBLATT, Petitioners v . COMMISSION .R OF INTERNAL REVENUE, Responden t Docket No . 17002-06S . Filed October 30, 2008 .

Elizabeth Opalkaj and Suzanne Meiners-Levy , for petitioners .

RUWE, Judge : Ths case was'heard pursuant to the provisions of section ~7463 ofthe internal Revenue Code in effect when the petition was filed .' ursuant to section 7463(b), the decisio n

SERVEW OCT 3 0 2008

to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case .

Respondent determined deficiencies in petitioners' Federal income taxes of $33,583 and $20,684 and section 6662 accuracy- related penalties of $6,716 .60 and $4,136 .80 for the taxable years 2.002 and 2003, respectively . The issues for decision are :2 (1) Whether petitioners' aircraft activity during 2002 and 2003 was engaged in for profit within the meaning of section 183 ; (2) whether petitioners are entitled to deductions for worthless stock and bad debts incurred in 2002 ; and (3) .whether petitioners are liable for section 6662 accuracy-related penalties for 2002 and 2003 .

Respondent also determined that petitioners' itemized deductions should be decreased by $2,534 in 2002 and $2,052 in 2003 . These are computational adjustments that depend on our disposition of the other issues in this case .

3 - Backgroun d Some'facts'have been stipulated and are~so found . The stipulation of facts and the attached exhibits are incorporated by this reference . t the time : of filing the petition, petitioners resided n Iowa .

Ronald Rosenbla t '(petitioner) is a graduate of'Columbia University with a ba helor's . degree in art history, a minor i n economics, and"a master's of art . Petitioner also holds a Ph .D .

in economics .from,the University of'Idaho . Petitioner work-ed'as a professor and taugh economics for 7 years after he received his Ph . D' .'' In 2002, petitio er was employed by Principal Residential Mortgage ; Inc . (PRM), a subsidiary of`Principal Financial Group .

Petitioner' directly m naged°°six or seven people . Indirectly, he managed approximately 500 people . Petitioner- .worked approximately 50 hour' pe'rweek`in 2002, and he spent,most of his work week in the offi es of PRM in downtown Des Moines- . Most°of petitioner's incomea '2002 came from his position .at PRM .

Between 2002 and 003, -PRM .'"sold the division that petitioner managed to American Ho e Mortgage (AHM) . In 2003, petitioner was employed by AHM as an xecutive vice president of sales support and development . Peti ioner's work hours and responsibilitie s did not change very mu h between .2002 and 2003' . Petitioner Susa n Rosenblatt (Mrs . Rosen latt) is an anchor reporter for the, local .

FOX news network in Des Moines, Iowa . Petitioners reported wages on their Federal income tax-returns in excess of $593,000 for 2002 and $742,000 for 200 1 .

Petitioner always had an . interest in flying . Petitioner had been interested in being a pilot since .his youth . In 1965, when petitioner graduated from high school, he had an appointment to the Air Force Academy, and he intended to become an Air Force pilot . However, petitioner did not attend the Air Force Academy because,his eyesight did not meet the requirements for him to train as a pilot .

Petitioners' daughter Katie received flight instruction from Executive One Aviation (EOA), .beginning in 2001 . In the fall of 2001, petitioner also began taking flight training lessons from EOA . On June 6, 2002, petitioner formed KAR RRR Aviation Leasing, LLC (KAR RRR) . Mrs . Rosenblatt purchased a one-half interest in KAR RRR on September 30, 2002 . Before Mrs .

Rosenblatt became a member of KAR RRR, petitioner was the sole member, and they were the only two members thereafter .' Aside from petitioners, KAR RRR had no employees .

' Petitioners apparently accounted for the aircraft activity as a sole proprietorship on a Schedule C, Profit or Loss From Business, until Mrs . Rosenblatt became a member of KAR RRR in 2002 . Thereafter, petitioners accounted for the aircraft activity as a partnership on a Schedule E, Supplemental Income and Loss .

In June 2002 , AR RRR purchased a Cessna~172 R (N3529D ) aircraft .( Cessna)`f om,EOA . Petitioner has never been a license d pilot . Before the Cessna was purchased, petitioner had n o experience in the'av ation industry other than being a "frequent flyer" .

.Petitioner escribed his decision to purchase- the Cessn a "as a way of having good new plane upon which to learn, and as a way of starting a ew business with the'plane .

KAR RRR finance the Cessna with Cessna Finance Corp . (CFC) .

Petitioners paid 10 M ercent of the purchase price for the Cessna as a down payment, a .

d KAR RRR financed $144,350, the,balance'of the purchase price f r the Cessna, through CFC . Petitione r personally guarantee, the loan from CFC to KAR RRR . The .Cessna was hangared at Anke; y Regional Airport in Ankeny, Iowa .

On May 6, 2002, before petitioner purchased the Cessna, EO A provided a written projection of net income to petitioners related to a purchase and leaseback of a Cessna . EOA projected that if the Cessna wa rented out for 700 hours per year at $95 per Hobbs hour,' it c uld potentially generate $66,500 in gross receipts .6 After sub racting expenses for insurance, hangar, fuel, maintenance, on ine reserve, and management fees totalin g

6-Petitioners .had actual, gross receipts fromthe aircraft activity of $21',645 i 2002 and $31,865 in 2003 .

$44,725 , EOA projected a net income of $21, 775 on a leaseback by EOA of the Cessna .

Petitioner did not produce any other forma l business , plan for KAR RRR .

EOA's projection did not include , finance expenses, co mm issions , legal and professional services expenses, :or depreciation .

Reported expenses for petitioners ' 2002 and 2003 aircraft activity were as follows :

2002 Expense s Deductions Schedule C Schedule E Tota l Repairs and maintenanc e Interest Depreciation (and sec . 179 ) Commissions (and fees ) Fuel Hangar Insurance Miscellaneous Legal and professional service s Management fees Total $1,210 $2,146 1,777 73,447 1,595 3,513 2,495 -- 3,100 2,087 89,599 1,777 5,924 1,160 2,385 2,709 -- 16,515 $3,35 6 3,55 4 79,37 1 ; 2,75 5 5,89 8 75 0 5,20 4 3 9 3,10 0 2,08 7 106,11 4 Petitioner testified that he "worked off * * *'[a] pro forma and * * * [his] own notes about marketing and so on" and that those materials indicated that, "given a certain, ; number of hours per month of * * * lease that it would be profitable ." Petitioner's "pro forma" and marketing notes were not offered into evidence. !p, l Repairs and aintenance $8,739 Interest 5,942, . Depreciation (and 35,882 sec . 179 ) Commissions and fees) 4,282 Fuel 6,203 Hangar 1,500 Insurance 10,762 Miscellaneou 906 Legal and pr fessional . 1,50 0 service s Instruction 591 Total 76,30 7 On June 14, 200, KAR RRR, CFC, and EOA entered into a .

"Consent to Lease"Agreement " ( lease agreement ), related to th e Cessna . CFC require the lease agreement as a condition precedent to obtaini g financing on the Cessna because the Cessna would be rented out o the general public . Under the leas e agreement, KAR RRR was designated the "Lessor" and .EOA was, designated the "Lessee" . The lease agreement stated in pertinent part : "Neither Lesso [KAR RRR] nor Lessee .[EOA] shall furthe r lease the * * * [Cess "-a] or assign the Lease . without firs t obtaining the prior w itten consent of CFC , which consent may be withheld at the sole iscretion of CFC . " KAR RRR and EOA lso entered i nto an " Aircraft Marketing Agreement " ( marketing agreement ), drafted by Advocate Consulting, which stated as folio s :, .

AIRCRAFT .MARKETI G AGREEMENT This agreement, ade .on .this 14th day of . June, 2002 by ., and between KAR RR Aviation Leasing, LLC ., hereinafter .

- 8 referred to as the Owner, and * * * [EOAJ, hereinafter referred to as the Agent .

WITNESSET H

WHEREAS, Owner is the owner of one (1) Cessna 172R, Registration Number N3529D ; WHEREAS, Agent in the ordinary course of business develops relationships with prospective customers for owner seeking to rent aircraft ; i WHEREAS, Agent is willing to serve as marketing and compliance agent on a ,non-exclusive basis upon the terms and conditions herein set forth .

NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto do hereby agree as follows ; 1) Aircraft : Owner hereby authorizes Agent to serve as a nonexclusive marketer for the aircraft outlined on Exhibit A .

2) Terms of Agreement : The term of this agreement shall be for a period of seven (7) days commencing on the date hereof, and automatically renew each seven (7) days thereafter . This agreement shall be subject to termination by either the Owner or Agent for any reason whatsoever upon five (5) days advance written notice given to the other party .

3) The aircraft will be based at the Ankeny Airport, and the owner will assume all responsibility for storage fees in the amount of $125 .- per month for heated, community hangar space .

4) Owner has had the aircraft inspected b y [EOA], verifying that the aircraft meets the standards required by the Federal Aviation Regulations and that a valid Airworthiness Certificate exists in respect thereto, and that all other requirements and paperwork are in good order and effect .

5) The fees payable by Owner to Agent for the rental of said aircraft shall be calculated at the rate of 15% of the gross Hobbs rental charge . At the start of this agreement, said hourly rate shall be $90'..00, and may be adj sted with approval of both parties . The rent shall b .e aid within ten days after the end o f each calendar onth, based upon the hours rented during each prior mon h . . Agent agrees to waive charges for' the use of the aircraft by Owner : follow scheduling procedures established by Agent for the reservat'io s of aircraft . and to return aircraft with full fuel to the Agent .

.. Owner agrees to 6) Owner s satisfactorily thereby meeting Aviation Admin i all maintain the aircraft t o etain its airworthiness certificate the requirements of the Federal tration .

7) .Owner s fuel, oil, lubr the .operation . o by Agent to Own cents below the all shop labor current list an cost, plus frei required & rout * * * [EOA] mai to Owner .

8) Renters 12 hours total Approved Curren this aircraft . this aircraft s all times .

all furnish at their own expense all cants and other materials necessary fo r said aircraft . Fuel shall be price d r at the leaseback-rate of twenty (20) then current retail . rate . In addition hall be priced at $5 per'hour belo w parts shall : be charged at 15% above ht or other added charges . Al l ne maintenance may be performed by the tenance facility without prior notic e shall-be required at a minimum to have ime plus a sign-off from an FA A Flight Instructor in order to solo Other than for maintenance down time , all . be available .for scheduled rent a t force and effect shall be writte n parties and nami Lienholder as in of the Owner, Ag risk is covered the Owner shal l insurance at th e shall provide Ow in force and sat holder . Agent s the aircraft is if such damage i by a customer re at their own expense . Such insuranc e by an underwriter satisfactory to all g the Owner, Agent and Curren t ured, and shall protect the interest s nt and Current Lienholder . If'the y the insurance policy of the Agent, repay Agent'the amount , of suc h first of each calendar month and Agent er evidence of such Insurance coverage-- sfactory,to the Owner and Current Lien all be responsible for deductible if amaged while hangared at * * * [EOA] , caused by an * * * [EOA] employee o r ting the aircraft through * * *. [EOA] .

10) The term of this agreement shall be 5 years, commencing on the below mentioned execution date . ' Owner may terminate this agreement for any reason upon thirty (30) days written notice to Agent . lu Petitioner provided documents (logs) indicating his 'll involvement with KAR RRR during 2002 and 2003 . These logs sho w that petitioner spent approximately 197 .058 and 208 .25 hours o n KAR RRR activities in 2002 and 2003, respectively .9 Petitione r prepared these logs himself, though he admits they are!'' incomplete . Much of the time reflected in petitioner's .. logs represents time during which he participated in flight instruction, ground school, and test flights .

Petitioners relied on the services of EOA for taking reservations for the Cessna, providing storage for the'iCessna, and providing : licensed flight instructors to fly the Cessna . The customers who rented the Cessna did not enter into written leas e II' agreements, but they did sign a document ensuring that the peopl e who flew the Cessna were licensed pilots . These agreements were maintained by EOA . The people who flew the Cessna included both flight instruction students and private pilots . KAR RRR's Cessn a

The logs separate petitioner's "Business Time" and "Travel Time" spent on KAR RRR . In 2002, petitioner's log reflects 52 .75 hours of travel time and 144 .3 hours of business time .` In 2003, petitioner's log reflects 41 hours of travel time and 167 .2 5 hours of business time .

- 1 1 was one of three o r four aircraft available to rent at(cid:127)the_ .Ankeny Regional Airport-in 2002 . and 2003 .

Benefit Techn o ogies, Inc . (cid:127)(BTI), is a research and development business specializing in full flexible benefit plan s for small to midsiz e founder of BTI and ils still actively involved with BTI . BTI ' filed for chapte r ankruptcy .protection in February 2001,' shortly after BTI d e aulted on a $250,000 interest payment to a venture capital fir m on January 15, 2001 . Sometime after filin g for bankruptcy, . BTI ' bankruptcy proceedings were converted from chapter 7 to chapte r 11 .

.

Petitioner own e BTI stock, lent money to BTI', and served o n BTI's board of direc BTI . Petitioner wa s having attended occaIional board meetings . Petitioners claime d 2002 relating to the alleged worthlessness d loans that :petitioner made to BTI .

Discussio n Generally, the ommissione(cid:127)r's determinations in a notice of deficiency are presumed correct, and the,taxpayer'bears the burden . of proving that the determinate ns are incorrect . "Rule I .

Claimed Losses From Aircraft Activit y Pursuant to section 183(b), deductions with respect to an activity "not engaged in for profit!' generally are limited to the amount of gross income derived from such activity . Section 183(c) defines an activity not engaged in for profit as ; ;"any activity other than one with respect .to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212 . " Deductions are allowed under section 162 for the ordinar y and necessary expenses 'of carrying on an activity whic h constitutes the taxpayer's trade or business . . Deductions are allowed under section 212 for expenses paid or incurred(cid:127)in connection with an activity engaged in for the-production or collection of income, or for . the management, conservation, or maintenance of property held .for the production of income . With respect to either section, however, the taxpayer must demonstrate a profit objective for the activities in order to deduct associated expenses .

Dreicer v . Commissioner , 78 T .C . 642, 644- 645 (1982), affd . without published opinion 702 F .2d 1205 (D .C .

Cir . 1983) ; Warden v . Commissioner , T .C . Memo . 1995-176, affd .

without published opinion 111 F .3d 139 (9th Cir . 1997) ;--sec .

1 .183-2(a), Income Tax Regs . In order to meet the required profit objective, "the taxpayer's primary purpose for engaging in the activity must be for income or profit ."

Commissioner v .

Groetzinger ,, 480 U- c . 23, 35 (1987) ; Bot v . Commissioner , 353 F .3d 595, 599 (8th ir . 2003), affg . 118 T .C . 138 (2'002) ; Am .

Acad . of Family Ph icians v. . United States, 91 F .3d 1155, 1157- 1158 . (8th Cir . 1996) .

Section 1 .183-2(b) ., Income Tax Regs ., provides factors to be considered when determining whether an activity is engaged in for profit as-follows :

(b), .-Relevant factors .--In determining-whether an activity .is engaged in for profit, all facts and circumstances with respect to the activity are to be taken into accont . No one factor is determinative in making this det rmination . In addition, . .it is not' intended that oily the factors described in this paragraph are t -be taken into account .in making the determination, r that a determination is to be made on the basis that he number of factors (whether or . not listed in this aragraph) indicating a lack of profit objective excee s the number of factors indicating a profit objective , or vice versa . * * * Nine nonexclusive factors are set forth in the regulations which are to be considered when determining profit intent . Those factors are : (1) .Th manner in which the taxpayer carried on the activity ; (2) the ex ertise of the taxpayer or his advisers ; (3 ) the time and effort ~xpended by the taxpayer in-carrying on th e activity ; (4) the exLectation that assets used in the activit y may appreciate in value ; (5) the success of the taxpayer in carrying on other si ilar or dissimilar activities ; (6) the taxpayer's history of income or losses with respect to th e activity ; (7) the amount of occasional profits, if any, which ar e earned ; (8) the financial status of the taxpayer ; and (9) whether 14 - elements of personal pleasure or recreation exist .

Id ..

Not all of the factors are applicable in every case, and no one factor is controlling . See Abramson v . Commissioner , 86 T .C . 360, 371 (1986) ; sec . 1 .183-2(b), Income Tax Regs . We begin by applying each of these factors to the facts relating to petitioners' aircraft activity .

The fact that a taxpayer carries on an activity in~.a businesslike manner and maintains, complete and accurate books and records may indicate that the activity was engaged in for profit .

See Engdahl v . Comm issioner , 72 T .C . 659, 666 (1979) ; sec . 1 .183- .

2(b)(1), Income Tax Regs .

During the years at issue, petitione r kept logs noting his involvement with KAR RRR, but he admitted that those logs were incomplete . The logs were not made contemporaneously with the activities petitioner noted therein .

Much of the time memorialized in the logs is attributable to travel time and time that petitioner spent on his own flight training activities and classes .

Petitioner failed to develop a formal business plan .

Although petitioner testified that he used a "pro forma", it wa s not produced at trial . EOA's financial projections overestimate d the profitability of renting the Cessna, and the projecte d expenses did not include finance expenses , sales tax, o r registration fees and did not take into account actua l depreciation of the Cessna .

Petitioner tes_ified that he was active in advertising the Cessna throughout the community, but he failed to adequatel y corroborate : that tes imony with evidence of such marketin g activities . (cid:127)Petitio er also did bookkeeping for KAR'RRR, including=the estab i shment and maintenance of the'company bank account . However, p titioners relied on . the services of EOA for e the day-to--day. renta of the Cessna , including takin g reservations for the Cessna , providing storage for the Cessna, and providing licens d flight instructors to fly the Cessna .

Moreover, the mainte ance,ren.tal of the aircraft,-and collection of rental receipts w re performed by either .EOA or the flight instructors associa t d .with the rental flights .. Petitione r explained at'trial t at student pilots and renters would'pay .EOA directly for the use of the Cessna at the end of the renta l period . EOA would t en credit the account of KAR RRR for the fee- .

generated . At the e d of the month, EOA wou .ld ;deduct :thei r commission and : other expenses , such as fuel and maintenance .

Petitioner was not quIalified to perform th e maintenance on th e Cessna necessary to k ep it airworthy . Petitioner reviewed :some of these activities b t did not perform them himself and .

otherwise had limite d involvement`in the day-tb-day,activitie s involving the Cessna ..

Consequently, consideration of the first factor weighs against the finding of a profit objective .

A taxpayer's expertise or that of his advisers is 'a factor in determining profitability . Sec . .1 .183-2(b)(2), Income Tax Regs . Before his purchase of the Cessna, petitioner had no relevant experience in the aircraft industry . Petitioner spent time "going on the FAA's website" to understand what rules and regulations governed private aviation . He also researched Cessna's advisories about his type of aircraft to determin e "whether there were recalls or anything like that ."

i Petitioner sought advice in selecting the appropriate aircraft for the activity, relying in part on the knowledge of local flight instructors . Otherwise, petitioner relied on EOA, the seller of the Cessna, and Advocate Consulting . Before the purchase of the Cessna, petitioner was informed by EOA's president that the Cessna could be rapidly depreciated,i!for tax purposes . At the same time, employees of EOA informed petitioner that Advocate Consulting could structure the purchase of the Cessna in a tax-advantageous manner . Petitioner's independent research-'on Advocate .. Consulting entailed going online and trying "to get a little background on the * * * company ." Petitioner did not know anyone else who was referred to Advocate Consulting .

Petitioner testified that Advocate Consulting agreed to represen t petitioners before the IRS as part of their agreement ;, with KA R

RRR .

17 - Petitioners'-retained the services of Advocate Consulting on a yearly basis . Petitioners sought the advice of Advocate Consulting because a rcraft-leasing "was a field that [petitioner] really idn't know in terms of-legal or tax issues .'

When asked at trial if he ever thought that the tax advice he received was too goo to be true, petitioner responded that if he's "paying for their advice and ' their . counsel tells me that this is the way it is,-then *(cid:127)* I believe them .

As we have alrea y noted,, EOA provided a written projection of,net income that di not include finance expenses, commissions, legal and professiona services expenses, or tax depreciation expenses related to t e Cessna . Given petitioner's educationa l background in economi :s and his discussions with- employees of EOA' and Advocate Consulti g about structuring the purchase of the Cessna in~a tax-advan ageous manner, it is reasonable to assume that petitioner recog ized the significant distortions these omissions would create between the projected profits and the profits or-losses from the aircraft activity that petitioners would report on their tax returns . In preparing for an'activity, a taxpayer need not m ke a formal market'study, but might be expected to undertake a basic investigation of the factors that a would affect profit . Westbrook v . Commissioner, T .C . Memo . 1993- 634, affd . 68 F .3d 868-(5th Cir . 1995) . Yet petitioner failed to seek an objective opinion about the profit potential of(cid:127)such a n undertaking . and relied heavily on parties with their on subjective interest in the transaction . Under the circumstances, petitioner's independent research of profitability . of the aircraft activity was insufficient . Consequently, the'secon d factor weighs against a finding of a profit objective .

The fact that a taxpayer devotes much of his personal time and effort to carrying on an activity, particularly if .there are no substantial personal or recreational elements, may indicate a profit motive . Sec . 1 .183-2(b)(3), Income Tax Regs . Much of the time that petitioner spent on the aircraft activity involved his own flying lessons . Petitioner and his daughter, had decided to learn how to fly, and petitioner purchased the Cessna as a way to do that . Petitioner had long wanted to learn to fly airplanes, having attempted to join the Air Force when he was younger .

.Petitioner created logs documenting hi,s activities related to th e Cessna . The logs, though incomplete, indicate that petitioner spent approximately 197 .05 and 208 .25 hours on KAR RRR activities in 2002 and 2003, respectively . Much of that time represents petitioner's own flying instruction . While the logs . petitioner kept indicate some activity that could be construed as business related, it could also be construed as a genuine interest in a recreational activity . Regardless, the relatively small amount of time spent on this activity that was substantiated in the record does not outweigh the evidence indicating that petitioner f had a significant in terest in the recreational elements of th e activity . Consequently, the third factor does not support a finding of a profit objective .

An expectation that the assets used in the activity will appreciate in value ight indicate a_profit objective ;. Sec .

1 .183-2(b)(4), Incom Tax Regs . It is unlikely that petitioner expected the Cessna, , the only asset owned by KAR RRR, to appreciate in value . Additionally, absent extenuating circumstances, none of which were established in this case, the regular-wear and tea on a Cessna would likely cause economic depreciation . Accordingly, the fourth factor weighs against finding-a profit-obj ctive .

The fact that t e taxpayer has engaged in similar activitie s in the past and cony rted them from unprofitable to .profitable enterprises may indicate that he .is engaged in the present activity for profit, even though the'activity is presently, unprofitable . . Sec .

.183-2(b)(5), Income Tax Regs . Petitioner had no previous'expe ience in, the aircraft-industry, and provided no evidence that he had engaged in any similar activities for profit . Consequently, the fifth factor is neutral .

.

A series of :;losses'during'the initial or startup stage of an activity may not necessarily be an indication that the activity .

is not engaged in for profit . Sec . 1 .183-2(b)(6), Income Tax Regs . However,,where losses continue to be sustained beyond the period that customarily is necessary to bring the operation to profitable status, such continued losses, if not explainable as due to customary business risks or reverses, may be indicative that the activity is not being engaged in for profit .

Id .

Ultimately, a taxpayer must demonstrate an ability to make a profit in the long term to offset any startup losses . See Bessenyey v . Commissioner , 45 T .C . .261 (1965), affd . 379 F .2d 252 (2d Cir . 1967) .

There was no prior history . of either profits or losses from petitioner's aircraft activity because the years at issue were the first 2 years in which petitioner's aircraft activity existed . In neither 2002 nor 2003 did the aircraft activity generate a profit .10 Petitioner testified and submitted evidence indicating that in the years following the years at issue, several flight instructors who had used petitioner's Cessna to give lessons decided to start their own flight instruction business using petitioner's Cessna at Des Moines International Airport . Petitioner explained that he became very involved in the marketing and organization of this new business and had plans to merge his aircraft activity with the flight instructors' .

business . However, petitioner failed to submit evidence regarding the profitability of the aircraft activity in the year s to The aircraft activity generated losses of $84,469 for 2002 and $44,442 for 2003 .

after 2003 . Without) any proof of profitability in later years , the sixth factor is(cid:127)ieutral .

The amount of occasional profits earned in relation to the amount of losses incurred may provide useful criteria in determining the tax .p yer's intent . Sec . 1 .183-2(b)(7), Income -- Tax Regs .- A-s . we hav established, there is no history of the aircraft activity's eing profitable . Consequently, the "sevent h factor is neutral .

Substantial income from sources other than the activity may indicate that the activity is not engaged in for profit, especially if there are personal or recreational elements involved .- Sec .

1 .1813-2(b) ' (8), Income Tax Regs . Petitioner worked approximately 50 hours per week in 2002, and he spent most of his work week in he offices'ofPRM in downtown Des Moines .

Most of petitioner's income came .from his position at(cid:127)PRM .` Petitioner's hours a rd responsibilities did not change 'very much between 2002 and 200--" . Petitioners . reported salaries in`excess of $593,000 in-2002 and $742,000 in 2003 . The losses created 'by the aircraft activit , if found to be deductible, would offset some of petitioners" substantial salaries and generate~a significant tax savings in the years at issue . Consequently', the eighth factor weighs against a profit objective .

' Finally, the presence of personal motives in carrying on an activity may indicate that the activity is not engaged in for profit, especially where there are recreational or personal elements involved . Sec . 1 .183-2(b)(9), Income Tax Regs""i .

Petitioners' daughter Katie received flight instruction from EOA beginning in 2001 . In the fall of 2001, petitioner also began taking flight training lessons from EOA . Before taking flying lessons, petitioner always had an interest in flying . Being a pilot had been a long-term interest of .petitioner since his youth . Petitioner acknowledges the purchase of the Cessna as "a way of having a good new plane upon which to learn" .

Consequently, the ninth factor weighs against a finding of a profit objective .

When considering whether a taxpayer engaged in an activity for profit, greater weight must be given to the objective facts than to a taxpayer's mere statement of intent .

Beck v .

.

Commissioner , 85 T .C . 557, 570 (1985) . While some of petitioner's efforts could support an argument in favor of a profit objective, they could also be construed as a genuine interest in and an effort to contribute to an activity that provided personal pleasure in the form of a hobby . Regardless, petitioner's testimony and the evidence on =record in favor of petitioners' argument are insufficient to overcome the weight of the objective facts indicating that petitioners were not engaging 23 - in the activity pri m rily for profit ." Accordingly, we will ., sustain .respondent ' determination with regard to th e s created by the .aircraft activity .

' II .

Claimed Loss fr m Worthless Stock and Loan s On ` .their 2002 F deral income tax return, petitioners claimed losses of $432,34 6 lating to the alleged worthlessness of their BTI stock and loans etiti.oner made to B .I . On-petitioners'-2002 .T Schedule D, Capita l ains and Losses, they reported a short-term capital loss of $3.3 2 346 . related to BTI, which contributed .to a total net short-ter m loss of $412,,033 reported for that year .

Petitioners also rep rted a $100,000 long-term ; capital los s related 'to BTI on . .t h it ScheduleD for 2002, which contributed to a total net long-te r capital loss of $26,245 . -Petitioners were limited by section- 1 11(b) :.(1)`to a recognized capital loss o f $3,OQO on their 200 2 Federal income, tax return . Petitioner s carried forward a s h rt-term capital loss of $409,033 and a long- term capital loss of $26,245 . to 2003 .

.

Respondent dis a lowed petitioners', claimed capital losses , relating to BTI . H o ever,, respondent .concedes that afte r application . of the . s ction 1211(b)(1) capital loss limitation i n 2002, petition'ers' F deral'income tax return,for 2002 reflecte d ' Because we .f i not engaged in with decide whether petit activity losses subj 469 .

d that petitioners' aircraft activity wa s he required profit objective, we need not oners ' losses were nondeductible . passive ct to the limitations imposed under sec .

the appropriate amount of capital losses (i .e ., capitaliloss of $3,000) . Accordingly, the disallowance of the reported loss with respect to BTI affects only petitioners' taxable income for 2003 .

Petitioners argue that the BTI stock became worthless and that their loans to BTI became nonbusiness bad debt when BTI "ran out of opportunities to sell the company" in 2002 . Respondent argues that neither the stock nor the loans became worthless in 2002 .

In order for a taxpayer to claim a loss for worthless securities in a taxable year, the security must .become worthless in that taxable year . Sec . 165(g)(1 .) . A loss shall be treate d as sustained during the taxable year in which the loss occurs a s evidenced by closed and completed transactions and as fixed by identifiable events occurring in such taxable year . Sec . 1 .165- 1(d)(1), Income Tax Regs . Total worthlessness of the security is required for the deduction . Sec . 1 .165-4,, Income Tax Regs . N o loss deduction is allowed for partial worthlessness or for mer e decline in value . Sec . 1 .165-5, Income Tax Regs . Stock becomes worthless and the loss is sustained only when the stock has no liquidating value and there is no reasonable hope and expectation that at some future point in time it will become valuable .

Duncan v . Commissioner , T .C . Memo . 1986-122 . The burden is on the taxpayer to establish the worthlessness of the stock and the year in which it became worthless .

Id . (citing Boehm v .

Commissioner , 326 U established"satisfa c only only by some "identifiable event" in the corporation's li expectation of revit business operations, , appointment of a re c fiver for it .

Morton v . Commissioner , 3 8 B .T .A . 1270, 1279 (1 38), affd . 112 F .2d 320 (7th Cir . 1940) . .

In the case,-o f taxpayer other than a corporation, wher e any nonybusiness deb t the loss resulting t erefrom shall be considered a loss from the .

sale or exchange, du held for not more-t h nonbusiness debt is debt has become tota ly worthless . Sec . 1 .166-5(a)(2), Incom e Tax Regs . The burde worthlessness of the worthle-ss .

Crown ,.v . IComm i is generally accepte d that-the year of worthlessness is to be fixed by identifiabl e events which form the basis of reasonable , grounds for abandoni n hope of recovery .

Id .

Whether petition is loans-made to BTI should be evaluate d for fitting the,defin .tion of worthless securities or nonbusines s bad debt depends on w~ether the debt is evidenced by a security as defined in section 165(g)(2) (C) .12 Sec . 166(e) . ; However, each of these alternatives requires petitioners to show that, at the end of 2002, there was no reasonable prospect for recovery .

See Boulafendis v . Commissioner , T .C . Memo . 1984-321 (citing Boehm v . Commissioner , supra ,at 291-292 ; Crown v . Commissioner , supra at 598), .

Accordingly, we begin our analysis by addressin g this issue .

Mr . Hyman testified that BTI owned furniture, fixtures, an d a patent on the use of linear programming at, the time it file d for bankruptcy in 2001 . He testified that BTI had substantia l value at that time . Almost immediately after the bankruptcy filing, the venture capital firm on whose interest payment BTI defaulted and another company submitted .separate bids to purchase the assets of BTI for $2 million ., Mr . Hyman testified that if a .

sale had occurred in 2001, BTI shareholders would have benefited .

However, Mr . Hyman believed that BTI could be .sold for, and the assets were worth, significantly more than $2 million . According to Mr . Hyman, that is the reason that BTI's bankruptcy truste e turned down both of the $2 million offers .

P; Mr . Hyman testified that it was reasonable for petitioner to believe that he could get something for his investment in BTI a t

the end of 2001, eve after it filed for bankruptcy . At that time, Mr . Hyman was,iopeful .that a sale was going to occur . . Mr .

Hyman testified that, .when no sale occurred, the company was "pu t into cold storage " th the goal-of-trying to raise money . . BTI' s bankruptcy proceedi n was later,converted-from chapter 7 to chapter 11 . .-BTI i s resently operating as a business in chapte r 11, and Mr . Hyman to tified that "there's activity now startin g to try to . raise capi al within the chapter 11 environment to b e able to, to bring t h company . potentially . out of . chapter 1 1 and operate * **"-the co pang ."

The evidence . p r sented at trial, combined with Mr . . Hyman' s testimony, indicates that BTI had value at all times in 2002 an d still has value . Pe itioners_havewfailed to . carry their burde n of proof to show that there was no reasonable prospect of recovery for their s ock .and loans .in 2002 . Accordingly, we hold that petitioners . are not entitled to deductions for worthless securities or nonbus'ness bad debt .

III .

. AccuracV-Related Penalt y With respect to the accuracy-related penalty under section 66 .62(a), the Commissioner has the burden of production ., Sec .'

7491(c) . To prevail, the Commissioner must'produce sufficient evidence that it is a propriate to apply the penalty to the taxpayer .

.'Higbee v . ommissioner, 116 T .C .438, 446 (2001) .

Once the Commissioner meets his burden of °production, the - 2 8 taxpayer bears the burden of supplying sufficient evidence to persuade the Court that the-Commissioner's determination is incorrect .

Id . at 447 .

Section 6662(a) and (b)(1) provides accuracy-related penalties equal to 20 percent of the underpayment of tax required to be ; .shown on a return if the underpayment is due to negligence or disregard of rules or regulations .13 For purposes of section 6662, the term "negligence" includes "any failure to make a reasonable attempt to comply with the provisions of * * * [the Code], and the term `disregard' includes any careless, reckless, or intentional disregard ." Sec . 6662(c) . "Negligence" also includes any failure by a taxpayer to keep adequate books and records or to substantiate items properly . Sec . 1 .6662-3(b)(1), Income Tax Regs .

An accuracy-related penalty 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) :,!(l) ; see Higbee v . Commissioner , supra at 448 . This determination is made based on all the relevant facts and circumstances .

Higbee v .

Commissioner , supra at 448 ; sec . 1 .6664-4(b)(1), Income Tax Regs .

.

- 2 9 Relevant factors°inc ude the taxpayer's efforts to assess his proper tax liability .

While we have h ld that petitioners did not have profit as their primary object've for entering into the aircraft activity, we believe that they had both personal and profit objectives in the sense that they actually hoped that their activity might produce a profit . S le Warden v . Commissioner , T .C . Memo . 1995- 176 . Sometimes it i difficult to determine which of two motive s for engaging in an a~tivity is primary . That is one of the basi c reasons for using ob ective facts to determine subjective intent .

But a finding that p ofit was not the primary motive does not automatically result in a conclusion that petitioners were negligent or intenti nally disregarded the rules and regulations .

See Bernardo v . Co mm issioner, T .C . Memo . 2004=199 ; Sherman v .

Commissioner , . T .C . Memo . 1989-269 . On the basis of the previously stated facts, we find that petitioners' reporting of their aircraft activity was not due to negligence and that they are not liable for the penalties with respect to the portions of the underpayments due to their aircraft activity . Likewise, we find that petitioners are not liable for the penalty on the portion of the 2003 u derpayment due to their claimed losses from worthless stock and l ans . The determination of worthlessness i n the situation describ d in this case is not without some`doubt , and while we have fouLd that petitioners have not proven worthlessness, we believe that they honestly believed that their stock and loans were worthless in 2002 .19 We therefore hold that petitioners are not liable for the section 6662 penalties .

To reflect the foregoing, Decision will be entered for respondent as to th e deficiencies and fo r petitioners as to th e accuracy-related penalties .

1a In petitioners' posttrial brief, they requested the following finding of fact :

62 . Dr . Rosenblatt believes his investments in Benefit Technologies became worthless in 2002 because during that year the bankruptcy trustee ran out of opportunities to the [sic] sell the company .

In his answering brief, respondent had no objection to this proposed finding of fact .

1. Unless otherwis indicated, all .section,references are t o the Internal Revenue C de in effect . for the .years in issue, and all Rule references ar to the Tax Court Rules of Practice an d Procedure .
2. Before trial, petitioners' counsel submitted to the Court a document entitled "Petitioners' Consolidated Pre-Trial Motion", which the Court treated as petitioners' pretrial memorandum . At trial, petitioners' counsel requested that the Court treat part of their pretrial memorandum as a motion for partial summary judgment (motion) . The Court obliged the request but,hdenied the motion and declined to rule on petitioners' counsel's request to shift the burden of proof . Petitioners failed to pursue some of the arguments made in their motion at trial or in their post- trial briefs . Accordingly, we deem those arguments to have been abandoned and will decide only the issues that petitioners' counsel disputed in their posttrial briefs . See Nicklaus v . Commissioner , 117 T .C . 117, 120 n .4 (2001) .
5. A Hobbs meter ils .a device used to measure the amount of time an'aircraft is operation .
8. The total time on petitioner's log for 2002 is listed as 191 .3 hours but actually adds up to 197 .05 hours .
12. Sec . 165(g) (2) (C) defines a "security" as "a bond, debenture, note, or certificate, or other evidence of indebtedness, issued by a corporation or by a government or political subdivision thereof, with interest coupons or in registered form ."
13. Sec . 6662 can also apply when there is a substantial understatement of tax . See sec . 6662(b) .(2) . However ; since the only reason given in the notice of deficiency for . imposing the penalty was negligence or intentional disregard of rules and regulations, and respondent did not raise sec . 6662(b)(2) until after trial, we will only consider the issue raised in the notice of deficiency .