T.C. Sum m ary Opi ni on 20 15 -4 0

UNITED STAT ES TAX COURT

GEORGE LAWRENCE STARKE, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 61 51 -1 3S . Fi le d J ul y 7, 2 01 5.

Geo rg e Lawren ce St ark e, pr o s e. W il li am J. Greg g, J oh n D. Ell is , andBart ho lo m ew Ci ren za, fo r res po nd en t.

SUMM ARY OPINION BUCH, Ju dg e: Thi s ca se was h eardpurs ua ntto sec ti on 74 63 of t he Int ern al Rev enue Co de ineffe ctwhen th e p et it io n was fil ed . Und er s ect io n 7 46 3( b) , th e 1 Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 Rev enue Co de ineffe ctforth e y ear i n i ss ue , andall Ru le refe ren ces are t o t he Tax (co nt in ue d...)- 2 -

de ci si on to be en te redinth is cas e is no t re vi ewab le by any ot he r co urt, an d thi s op in io n m ay

no t b e tr eat edas p rece de ntforan y ot he r cas e. The is su es be fo re the Co urt ar e whe th er Geo rg e St ark e rec ei ve d no ne m pl oyee co m

pe ns at io n i n 2 01 0 a ndwhet he r he is li ab le for anaccu racyrel at edpe na lty

un de r se ct io n 6 66 2( a). Bec au se an y am ou ntMr. St ark e m ay

ha ve rece iv edas n on em

pl oyee co m

pe ns at io n was tax ab le ina pr io r y ear, we h ol d t ha t Mr. St ark e is no t l iabl e fo r th e d efi ci en cy de te rm in edby resp on de ntor t he accu racy-rela te d p en al ty und er s ect io n 6 66 2( a). Bac kg ro un d Dur in g t he 19 70 s an d 1 98 0s Mr. St ark e was anoff en si ve li ne m aninth e Nati on al Fo otba ll Leag ue , m os t n ot ab ly w ith t he W as hi ng to n R ed sk in s. Aft er ret iri ng fro m

foo tb al l, Mr . Sta rk e o pe ne d acar d eal ers hi p i n M arylan d. Whil e ru nn in g h is car d eal ers hi p, M r. Sta rk e o bs erv edth atth ere was a sh orta ge of qu al ifi edservi ce t ech ni ci an s i n the gre at er Wash in gt on , D.C., area. He al so pe rcei ve d t ha t the re was a pr ob le m with v io le nc e an d p ov erty inth e are a. To ad dr es s the se pro bl em s, M r. Sta rk e es tabl is he d asch oo l tha t wo ul d t each pe op le in th e co m m un it y to be co m e au to m ot iv e se rv ic e te ch ni ci an s. (...co nt inue d) 1 Co urt Ru le s o f Prac ti ce an d P ro cedur e.- 3 -

Inth e la te 19 90 s M r. Sta rk e so ldhi s ca r de al ers hi p andco fo un de d t he Exce l In st itut e (Ex cel ), a n onpr of itco rp or at io n. Ex cel pro vi de d atwo -y ear p ro gr am th at taug htba si c rea di ng , writ in g, an d a rithm et ic inad di ti on to pro vi di ng job co un se li ng an d t ech ni cal tra in in g. Th e p ro gr am was a va il ab le free of c ha rg e to an y pe rs on s wh o wan te d t o p art ic ip at e so lo ng as t he y co m m it te d t o t he att en da nc e requi rem en ts . Ini ti al ly, Exc el di d n othave an y ou ts id e fu nd in g, an d M r. Sta rk e taug htm any

of t he cla ss es an d l arg el y fun de d i t h im se lf. Afte r Mr. St ark e’s or ig in al bo ardch ai r pa ss edaway , Jac k Lyon jo in edExce l as ch ai r. Even tu al ly, Mr. Ly onto okov er the da y -to -d ay m an ag em en t o f Exc el , whi chcrea te d t en si on be twee n h im an d M r. Sta rk e. As d iff

ic ul ti es be twee n M r. St ark e an d M r. Ly on gre w, Mr. St ark e’s res po ns ib il it ie s s hi fte d a way fro m m an ag em en t an d m or e in to fun dr ai si ng . In the lat e 2 00 0s Mr. St ark e le arn edof a n in ve st ig at io n i nt o Ex cel ’s fis cal m an ag em en t. Ci ti ng eth ic al co nc ern s, M r. Sta rk e st op pe d fu nd rai si ng forExce l. Dur in g M r. Sta rk e’s em

pl oym en t atExce l h e was pa ida sa la ry pl us a ho us in g a ll owa nc e. Mr. St ark e al so ha d a cces s t o a n Am eri canExp res s ca rdfor Exc el . Mr. St ark e u se d t he Am eri canExp res s ca rdforbo th pe rs on al an d Ex cel rel at edexpe ns es , bu t h e d idno t co ns is te nt ly pro vi de rece ip ts to Exce l s ho win g h is ex pe ns es . Accor di ng to on e o f Exc el ’s acco un ta nt s, dur in g t he y ear i n i ss ue if a n- 4 -

em pl oyee m ad e a p ur ch as e o n o ne of Ex cel ’s cred itcard s an d t he em pl oyee co ul d no t s ho w th atitwas a n e xp en se be ne fit in g Ex cel , Exce l wo ul d treatth e ex pe ns e as anadvanc e o r pr ep ai d e xp en se on th e em pl oyee’s be ha lf. Exc el ’s gen eral led ge rs fro m 20 03 to 20 10 sh ow v ari ou s en tri es lab el ed adva nc es or p rep ai d e xp en se s tha t ar e at tri bu tabl e to Mr. St ark e. All of M r. St ark e’s adva nc es an d p rep ai d e xp en se s o ccu rredbe twee n 2 00 3 a nd20 06 . In co nt ras t, the on ly entrie s fr om 20 07 to 20 10 are p ayro ll de du ct io ns forMr. St ark e th atoff se t the pre vi ou s ad va nc es an d p rep ai d e xp en se s. Mr . Sta rk e te st ifi edth at he di d n otkn ow wh y

th e am ou nt s wer e b ei ng de du ct ed , bu t h e as su m editwas rel at edto tax es or h eal th care expe ns es . Res po nd en t i nt ro du ceda 20 05 let te r fro m Exc el ’s acco un ta ntto Mr. Ly on est ab li sh in g arep aym en t p la n, i nc lu di ng payro ll de du ct io ns , to reco up “ sa la ry adva nc es to Geor ge Sta rk e th atha ve accu m ul at ed ov er the y ears .” Mr. St ark e st at edth athe ne ve r rec ei ve d aco py of th is let te r. Mr. St ark e’s em

pl oym en t wi th Exce l en de d i n 2 01 0. Subs eque nt ly, Exc el m ai le d M r. Sta rk e a 2 01 0 F orm 10 99 -MI SC, Mi sc el lane ou s In co m e, refl ect in g $8 3,6 98 .45 . Accor di ng to Exce l’s 2 01 0 g en eral led ge r, th is am ou ntrep res en te d adva nc es an d p rep ai d e xp en se s tha t M r. Stark e h adno t re pa idwhen he lef t Ex cel . Mr. St ark e rec ei ve d t he Fo rm 10 99 -MI SC b utdi d n otin cl ud e th e am ou ntinhi s in co m e whe n h e fi le d h is 20 10 Fo rm 10 40 , U.S. Ind iv idua l In co m e Tax Return.- 5 -

The Int ern al Rev enue Serv ic e ex am in edMr. St ark e’s 20 10 return. On Decem be r 17 , 20 12 , th e IRS is su eda no ti ce o f de fic ie nc y to Mr. St ark e ad

jus ti ng hi s i nc om e to in cl ud e th e am ou ntfro m th e Fo rm 10 99 -MI SC as no ne m

pl oyee co m pe ns at io n a ndde te rm in in g a n a ccu racy-rela te d p en al ty und er s ect io n 6 66 2( a). Mr. St ark e, whi le res id in g i n t he Dis tri ctof C ol um bi a, ti m el y

pe ti ti on ed . Dis cu ss io n The Co m m is si on er’s d et erm in at io ns inth e n ot ic e o f de fic ie nc y are g en eral ly pr es um edco rrec t, an d t ax pa y ers be ar the bu rd enof p ro vi ng ot he rwis e. Sev eral 2 ot he r ru le s ca n a ffec t the bu rd enof p ro du ct io n a ndth e b ur de n o f pr oo f. For ex am pl e, in anun rep orte d i nc om e cas e su chas t hi s, the Co m m is si on er g en eral ly m us t m ak e so m e m in im al ev id en ti ary sh owi ng (whi chhe ha s d on e) fo r th e pr es um pt io n o f co rrec tn es s t o a tt ach . Andwher e th ere i s a r eas on ab le di sp ut e 3 with re sp ectto anit em

rep orte d o n a n i nf

orm at io n re tu rn , th e Co m m is si on er h as th e b ur de n o f pr oduc in g re as on ab le an d p ro ba ti ve in fo rm at io n (wh ic h h e h as do ne ). Eventh en , th e b ur de n m ay sh iftto th e Co m

m is si on er u nd er s ect io n 4 74 91 (a) i f th e ta xp ay er i nt ro du ces cred ib le ev id en ce re ga rd in g t he is su e, ha s Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). 2 See Du nn e v . Comm is si on er, T.C. Mem o. 2 00 8- 63 . 3 Sec. 6 20 1( d) . 4- 6 -

co m pl ie d wi th th e n eces sa ry

subs ta nt ia ti on requi rem en ts , has m ai nt ai ne d a ll reco rd s, an d h as co op erat edwith re as on ab le reque st s fo r witne ss es , in fo rm at io n, do cu m en ts , m eet in gs , andin te rv ie ws. The re i s i ns uf fic ie ntin fo rm at io n i n t he reco rdto co nc lu de th atth e b ur de n s ho ul d s hi ft u nd er s ect io n 7 49 1( a), an d M r. St ark e d oe s n otarg ue th atth e b ur de n s ho ul d s hi ft. Acc or di ng ly, th e b ur de n rem ai ns on hi m . Butul ti m at el y th e b ur de n i s i m

m at eri al inth is cas e b ecau se we de ci de th is cas e o n the pre po nd eran ce o f th e ev id en ce. Sect io n 6 1 d efi ne s g ro ss in co m e as “ al l i nc om e fro m what ev er s ou rce de riv ed ”. In co m e canin cl ud e th e fo rg iv en es s o f in de bt edne ss or c om pe ns at io n fo r se rv ic es . In s om e in st an ces , com pe ns at io n c anbe adva nc edwith s erv ic es to be 5 pe rfo rm edlat er. The di st in ct io n i s an im po rta nton e. An adva nc e o n s erv ic es to be pe rfo rm edinth e fu tu re i s t ax edat t he ti m e o f th e adva nc e. In c on tra st , in co m e 6 fro m th e d is ch arg e o f in de bt edne ss is tax edat t he ti m e “ itbe co m es cle ar tha t a de btwil l n ev er h av e to be pa id ”. 7 Whe th er an am ou ntis anadva nc e o r a l oa n turns on th e que st io n o f whe th er a d eb to r-cr ed it orrel at io ns hi p was est ab li sh edat t he ti m e th e fund s wer e d is bu rs ed . Sec. 6 1( a)(1 ), (1 2) . 5 Bea ve r v. C ommis si on er, 5 5 T.C. 8 5 (1 97 0) . 6 Co zzi v. Co m

m is si on er, 8 8 T.C. 4 35 , 44 5 (1 98 7) . 7- 7 -

Inth e cas e o f a l oa n, wh ic h i s n otin cl ud edinin co m e atth e ti m e th e fu nd s ar e di sb ur se d, the pa rti es ag ree t ha t the am ou ntwil l b e rep ai d andth e d eb to r-cr ed it or rel at io ns hi p i s es tabl is he d a t the ou ts et . Howev er, anadva nc e th atis co ns id ered 8 co m pe ns at io n fo r se rv ic es , alb ei t s erv ic es to be ren de redinth e fu tu re, co ns ti tu te s ta xabl e in co m e in th e y ear i t i s re cei ve d. W e d et erm in e whe th er a b on a fi de 9 de bt or -cre di to r rel at io ns hi p e xi st s b y ex am in in g a ll of the pe rti ne ntfact s an d “ [a]n es se nt ia l el em en t i s wh ethe r th ere e xi st s a g oo d- fai th in te ntonth e p artof t he reci pi en t o f th e fu nd s t o m ak e rep aym en t an d ago od -fai th in te nton th e p artof t he pe rs on adva nc in g t he fun ds to en fo rce re pa ym en t.” 1 0 Here, re sp on de ntarg ue s the pa ym en ts are ad va nc es an d n otlo an s. We ag ree t ha t the pa ym en ts are n otlo an s b ecau se we fin d n o e vi de nc e th atMr. St ark e in te nd edto rep ay

th em at t he ti m e th e p aym en ts were m ad e. Altho ug h M r. Sta rk e in cu rredpa yro ll de du ct io ns by E xc el , he t es ti fie d t ha t h e d idno t kno w why th e am ou nt s wer e b ei ng de du ct ed . Furt he r, th ere i s n o e vi de nc e o f lo ando cu m en ts or an y ot he r do cu m en t s ig ne d b y Mr. St ark e an d am em

be r of Exce l m em or ia li zi ng a

Co m m is si on er v . Tuft s, 4 61 U.S. 30 0, 3 07 (19 83 ); B eav er v . 8 Co m m is si on er, 5 5 T.C. at91 . Bea ve r v. C ommis si on er, 5 5 T.C. at91 . 9 Fi sh er v . Comm is si on er, 5 4 T.C. 9 05 , 90 9- 91 0 (1 97 0) . 1 0- 8 -

lo anag reem en t. Eve n t he 20 05 let te r fro m Exce l’s ac co un tant s tha t s etforth a rep aym en t p la n m ak es cle ar tha t Ex cel an d i ts acco un ta nt s d idno t co ns id er the pa ym en ts to be lo an s, i ns te adch arac te riz in g t he m as a dv an ces . Bec au se we ag ree t ha t the pa ym en ts were n otlo an s, we wo ul d o rd in ari ly lo okto whet he r th e p aym en ts are co ns id eredadvanc es ; h owe ve r, whe th er the pa ym en ts are ad va nc es is irr el ev an t i n t hi s ca se be cau se all of the it em s re co rd ed by Excel as a dv an ces or p rep ai d e xp en se s wer e rec or de d fo r y ears th atare n ot be fo re the Co urt. Acco rd in g t o Ex cel ’s gen eral led ge rs , all of t he pa ym en ts were m ad e b efo re 2 01 0. Be cau se adva nc es are t ax ab le forth e y ear i n wh ic h t he y are pa id , any adv an ce wo ul d h av e b een tax ab le fory ears th atare n otbe fo re u s. The refo re, res po nd en t’s ad jus tm en ts ba se d o n t he 20 10 Fo rm 10 99 -MI SC, whi chin cl ud es am ou nt s at tri bu tabl e o nl y to po te nt ia l ad vanc es , are d is al lo wed be cau se no ne of t he am ou nt s ar e ta xabl e fo r 20 10 . Becau se of t hi s h ol di ng , Mr. St ark e is als o n otli ab le forth e acc ur acy-rela te d p en al ty und er s ect io n 6 66 2( a). To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redfor pe ti ti on er.