mom corporation which was the petition of lois asking the court to reverse the decision of the united states tax court that court upheld commissioners of internal revenue service is denial of compensation duction for and and to demonstrate that they were in fact compensation and that they had actually been paid the tax court also held that little monkey had not shown that the compensation expenses were ordinary necessary reasonable and it also applied a heightened level of scrutiny in making its to try how was it that they were ordinary necessary because he took roughly eight hundred some thousand dollars in payments every one of those invoices so to speak says pay me eighteen thousand five hundred twenty two dollars in this order four thousand two hundred three thousand seven hundred all these odd numbers all of which are under the stress a r ce the the ten thousand dollar limit how is  it that he there's nothing there or they're all the same thing doesn't say anything about what he did or does other than a generic description yes there is a generic description but the reason for that is because  franklin sanders who is the provider of the services doing business through his d b a had been doing this for thirty some years as the court may be aware little mountain purchased his businesses some fifteen years earlier and franklin sanders had been doing this for thirty some years so he knew what he was doing he knew  and both sides have testified to this that his tasks his daily tasks were so repetitive and usual that there was no need for a particular rise description of the services that he rendered on every however i would point out i did have something to do with you know this is i think that the tax court was a pretty clear in saying this is a very peculiar situation because this individual hasn't paid filed income taxes for any many years and does seem to be the elephant in the don't do you want to address that i'm sorry i've had a little trouble hearing your story it's so when we look at it at little mountains case that and to just follow up on such malloy's question this individual testified that he wouldn't call this compensation yes in fact so that's the that's the first problem i think you have to get around that if nothing else why isn't that why doesn't that defeat the claim well let me say this about that statement  to use in its opinion what it failed to do was also recognize the statement which immediately follows the testimony that you just pointed out franken sanders testified on cross examination that i was paid for the work that i did was quote i was paid in exchange for the work that i did it didn't he wasn't he didn't pay income taxes on that amount of money if it was come sation and he should have paid some income taxes on that there should have been a ten i knew nothing yes in the fact that mr sanders may or may not have paid income taxes on the money she received is a separate issue we believe that has no bearing upon the corporation's right limited to adoption for the amounts that were they paid the fact that attend ninety nine was not issued is considered in our cases to be anyway we believe that the tax court's decision was wrong this court should reverse for two reasons first it should also find it you find that the tax court's rulings regarding the compensation and paid issues  clearly erroneous because the tax court applied an incorrect standard for the quantum of proof required to substantiate those fans second point as to the ordinary necessary and heightened level of scrutiny theories those issues were not tried by the parties and they were never asserted by the commissioner until they appeared in the commission or simultaneous opening brief which was filed after the trial concluded what difference would it make if you had a different standard it seems to me the facts are the same here and whether it was additional scrutiny or not it's still a question of if this isn't compensation and it's not income what is it our position is that it was compensation to mr sanders but he said it wasn't you know he he made that statement in his testimony at trial he said  wouldn't call that compensation but then immediately after that your honor he testified as i've previously indicated that he was paid for the work he did and he was paid in exchange for the work he did but it isn't clear statement of whether the amounts he received his view was that it was compensation right the reason he's he said that he may have misunderstood the word compensation at that time i don't know the answer to that well it's a self serving statement but were the payments tied to corporate profits instead of services the payments were tied to the services that he rendered or are they in accordance with contractual obligations they were there was an oral  the minutes but then the argument in the briefing is it's an implied contract yes yes there is reference to the duties that he has performed which is something in the minutes and then the payments were made whenever he wanted them no i think they were made with some regular period to see who he submitted those whenever he wanted didn't whenever he needed money well he's in the one who form the before there were no other employees and i take it the business continues to operate just had always been is that right i don't know the answer to that i'm only aware of the facts and circumstances as they pertain to this particular year i don't know the entire history and who was working for it at what point what was the purpose of the payment arrangement if it wasn't to avoid income tax the purpose of the payment arrangement was simply to pay him for the services that he rendered the company received sixty three million dollars in gro receipts soley due to his efforts and the company paid him one point four percent approximately of that amount in compensation so our view is that it's very clear that it was because mr sanders was the only one who was providing those services he worked fifty to sixty hours per week his tasks were numerous they included writing a monthly fifteen thousand pages newsletter writing a daily technical newsletter interfacing with the customers developing trading strategies for hearing trade confirmations handling all the marketing of business was there ever a check made to franklin sanders my understanding believe the evidence provided was absolutely sufficient to establish i guess my question forgive me for interrupting but i want to make sure you have an opportunity to respond yes i'm trying to figure out why you think there was error given that standard of review soley based on if nothing else he testified he would not call it compensation well a witness can be confused at trial and again no followup was question was posed to him at the time he made that statement as to why he felt that was the case but i've already indicated in the court the two statements he made following it up which clearly show that he was paid for the services he performed so you think it was taken out of context forgive me if you think it was taken out of context without your son context was not because he wanted to avoid the one and a half hour trip from their home in west point tennessee to the bank first volunteer bank in warrensburg tennessee which was about a third it was about an hour and a half trip round trip all the time and curtis pat representing the commissioner of internal revenue not hers the task force finding that the payments in question even if they were actually made to mr sanders was not compensation is not clearly erroneous the difference between profits and compensation profits are income over the amount of expenses that were incurred in generating that income compensation is the fair market value of the employees services business generates profits by leveraging its employees productivity and its other assets including goodwill which includes items such as reputation and customer lists and the like little mountain stipulated that the business here included substantial goodwill the determining factor and classifying a payment as compensation is that it is based on the stamp and nature of the services rendered applied against a pre determined compensation rate do we know what that is here the pre determined compensation rate there is none not per day not per hour no an was no pre determined rate there's no demonstrated correlation between the payments any particular services rendered and there is no rate for the record shows mr sanders just issued his invoices based on whatever profits that were laying in the corporate bank account at the time there was no written contract so if we were to try to figure out what the terms were is there anywhere to look other than the minutes no your honor that's that's all there is the record is devoid of any at every bit of evidence that these payments were compensation and under these circumstances the tax course finding that they were not cannot be said to be clearly erroneous  he continued to do the same work both before and afterwards so he was providing services right yes and he and sure that there is some amount that he could have been compensated for those services and some amount that i mean that the company would not have made a very large sum of money have you not continue to do the newsletter and people and offer his advice and do all of that right that's right but there was a situation before this new arrangement and it was the taxpayers burden to demonstrate what part of those payments represented compensation and it just basement to get or nothing approach thing really took you know took what he took and what it was worth what it was worth but that's not evidence of compensation you would have a pre determined rate it's not base but you don't just take the profits that was the situation before this arrangement he had a sole proprietorship and he can help himself the profits that will as i understand he he didn't he had been paying personal income taxes for thirty years or something that's correct and so that situation had the same before and after as well  right so is that i or as trying to go after him individually for failure to pay income taxes i'm not aware of that but he didn't file returns so this there this there be no statute of limitations so iris would be free to pursue that in any point in time so if the if the payments aren't compensation what are they it's not the government's burden that they appear to be a distribution of profits but you know there are a number of theories they were pursued in this case didn't need to be pursued in this case this case is all about whether little mountain s of substantiating the claim to doctrines and it did not it was not the government's purton to demonstrate the exact nature of the distributions so he's saying they could be compensation but he just didn't prove it i can't rule that out yet i wouldn't if it's possible that he could have this range make it could have been structured he could have had an arrangement saying that you know that i'm tired of the hundred thousand dollars a year or a certain hourly rate or sitting in that corporation yeah right and it could be paid out of the dividends and them corporations family on the there's all types of complex theories that could be applied but we didn't need to and did not get into all those matters for purposes of this whether or not part of these payments could properly be substantiated as compensation is meaningless here because they have the burden of doing that and they fail to do that in the tax for considered all the facts and circumstances and appl its expertise and experience and reach the conclusion that they hadn't satisfy that burden and that nothing there's been nothing shown that would demonstrate clear air in the tank sco but that only two issues that were to look at on this appeal is whether it was compensation for services rendered and actually paid to him i money trails and everything that takes we did not find that to be convincing evidence that this money was actually paid to mr sanders and that the finding also was not clearly erroneous but the core holding if if there is no pre determined compensation rate and the payments were not tied to any particular services performed one plus one equals two it's not compensation so that determines that the case counsels since since you are here and you have several minutes left i appreciate that you're relying here just on whether there was payment and whether it was compensation but there is another argument and that the opposing counsel has made which is that the government basically had the ball and i am sure you know what i'm referring to that that he gotten very late notice at these other theories and since you're just relying on the ones that were in the written notice i think it's not a huge huge problem for you today but it is concerning to me that the position of the taxpayer is that the government was not forthcoming with its and the requirement to substantiate claim tax deductions and the requirement that they be reasonable you know is one of the most fundamental requirements of the internal revenue code and a tax payer claiming a tax deduction who claims to be unaware of those requirements simply cannot be taken seriously these are i mean what about the quality in the transcript that he points to where the government's counsel i have no idea if you even where the government council but where the response was from the government you know that we're not going to give our other theories and then taxpayers lawyers said well that's been a problem for us we haven't been able to get the government to to tell us what their theories are going to be that was it that was concerning to me and i'd like to hear your response you know those theories had to do well this arrangement his wife was like a general it ended up that the children were the beneficiaries of a trust as to which is wife was the set or so there could be an argument that the whole thing the attribution rules that he really own the corporation where he says he was an astute shareholder but that was not an issue that was we dropped that issue that issue w not pressed or ruled out of the text gordon with it was not necessary to do that the fact that there was no substantiation that the payments were compensation really alone disposes of the case regardless of that and their argument that  heightened scrutiny of the tax court as we all well know is as a fact finder of fact is charged with the responsibility of considering all of the surrounding facts and circumstances in applying its expertise and its experience to reach a decision as to what is claimed to be true is in effect true and there is no rule of law political in these circumstances that in discharging that duty it's required to close its eyes to the surrounding facts it wasn't necessary and we better than i didn't affect the case they're saying also that the tax court was suspicious of the entire arrangement improperly considered a mr sanders motors and things like that that's not those are really new issues those are just part points in response first of all i do want to express to the core exactly what evidence there was that was  provided with respect to the issue of it being compensation and what documentary evidence was provided by the taxpayer which was very thorough and very complete it included the testimony of the service provider the testimony of the service recipient the canceled checks which were contemporaneous with the payments are were made the little mounds general ledger little mounds bank statements all of that combined  work and tied together to support the fact that these amounts were actually paid to franklin sanders and that they were in fact compensation but they weren't actually paid to mr sanders were paid to cash write the checks were written to cash but the cash was then delivered to mr sanders that when you were going to be better if they were actually paid to him i don't know whether it's better or not better and i'm not prepared to restate  an opinion on that but the facts are that the cash was in the cash was eventually given to mr sanders and all parties acknowledges that with respect to the failure to file returns i find that somewhat concerning the the corporation did file its returns mr sanders may or may not have but the point is that his failure to file a tax return should have no impact as to whether or not little mountain corporation is entitled to a deduction for the amounts that it did pay for services rendered and then finally with respect to this being a distribution of profits i don't believe you can fairly characterize it as a distribution of profits or a constructive dividend or something of that nature mr sanders was not a shareholder of little mountain corporation as i've already explained he works  a great number of hours during the week fifty to sixty hours a week and he did perform these services yes both before the corporation was formed and after but he did do the work he was paid one point four percent of the sixty three million dollars in gross receipts that the corporation received and i don't think that that is an outrageous rate of payment as the court has mentioned of boils down to about two hundred fifty seven dollars an hour given the the great success that he had for this corporation i think the payments were well deserved and with that i would ask that the court reversed the decision of