T.C. M em o . 2 0 1 8 -1 9 0

UNITED STATES TAX COURT
DANN LEE DUNCAN AND KATHRINE GAY DUNCAN, Peti t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 6 7 27 -1 3
. Fi l edNo vem b er 1 3 , 2 01 8
.

Dan n Lee Du n can an d Kat h ri n e Gay Du n can , p ro s es e. Cas s i dy B. Co l l in s , An drea M . Fal d erm ey er, an dKat h eri n e H. An k en y , fo r
res p o n d en t.

M EM ORANDUM FINDINGS OF FACT AND OPINION ASHFORD, J u d g e: Res p o n d en td et erm in eda d efi ci en cy o f $ 26 ,7 1 6 i n p et i t i o n ers ’ Fed eral i n co m e t ax an dan accu racy -rel at edp en al ty p urs u an t t o s ect i o n- 2
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[* 2 ] 6 6 6 2 (a) o f $ 5 , 34 3 fo r t h e 2 0 0 8 t ax ab l e y ear. 1 Aft er co n ces s i o n s b y
res p o n d en t th e i s s u es rem ai n i n g fo r d eci s io n are: (1 ) wh et h er res p o n d en tt i m el y
m ai l eda n o t i ce o f d efi ci en cy t o p et i t i o n ers , (2 ) wh et h er p et i t i o ners fai l edt o rep o rt g ro s s recei p ts o f $ 3 0 ,0 00 o n t h ei r Sch edul e C, Pro fi to r Lo s s Fro m Bu s in es s , an d (3 ) wh et h er p et i t i o n ers h av e s ub s t an t i at edSch edu l e C d edu ct i o n s i n am o u n t s g reat er t h an res p o n den tal l o wed . W e res o l v e t h es e i s s u es i n fav o r o f res p o n d en t
. FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at i o n o f fact s an dth e at t ach ed ex h i b i ts are i n co rp o rat ed h erei n b y th i s referen ce. Pet i t io n ers res i d edi n Cal i fo rn i a atth e t i m e t h ey fi ledth ei r p et i t i o n wi t h th e Co u rt
. M r. Du n can (p et i t i on er) i s a s el f-em pl o y edat t o rn ey

wh o s p eci al i zes i n
wo rk ers ’ co m

p en s at i o n cas es fo r p o l i ce an dfi re o ffi ci al s. Pet i t i o n er i s h im s el f a ret i redp ol i ce o ffi cer. M rs . Du n can i s em p l o y edas a co rp o rat e s erv i ces o ffi cer fo r a b an k. Al l o f t h e ad

ju s t m en t s i n res p o n d en t ’ s d et erm i n at i o n p ert ai n t o p et i t i o n er’ s Sch edu l e C at t ach edt o p et i t i o n ers ’ jo in tFo rm 1 0 4 0 , U.S. In d iv i du al In co m e Tax Return , fo r 2 0 08 (jo i n tretu rn ). Pet i t i o n ers t i m el y fi l edthe jo i n treturn

1 Un l es s o t h erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de i n effect fo r t h e y ear at i s s u e, an d al l Ru le referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. So m e m o n et ary am o u n t s are ro u n d edt o t h e n eares td o l l ar.- 3
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[* 3 ] o n wh i ch t h ey rep o rt edwag e i n co m e fro m M rs . Du n can ’ s em p l o ym en tan d cl ai m eda Sch edu le C b u si n es s l o ss d edu ct io n fo r p et i t i o n er’ s l eg al p ract i ce. 2 I. Ch eckFro m

M r. W al k er Pet i t i o ner s ucces s fu l ly

rep res en t edKei th W al k er, a fo rm er p o l ice o ffi cer wh o was i n

juredi n t h e l i n e o f du t y , i n a l aws u i tag ai n s tthe ci ty o f Hunt i n g t o n Park , Cal i fo rn i a, h i s fo rm er em p l o y er, an d Cal PERS, th e Cal i fo rn i a St at e p en s i o n fu n d
. Pet i t i o n er rep res en t ed M r. W al ker fro m th e co m m en cem en t o f t h e s u i ti n 1 9 9 4 thro u g h i t s co n cl u s i o n i n 2 0 0 8 , an dM r. W al k er recei v eda l u m p -s um p aym en t ex ceed i n g $ 3 6 0 ,0 0 0 co n s i s t i ng o f accru edp en s i o n b en efi t s . Pet it i o n er recei v eda $ 2 ,5 0 0 “ fl atfee” p ai db y M r. W al k er atth e o u t s eto f t he l aws u i ti n 1 9 9 4
. Aft er t h e l aws u i tco n cl ud edp et i t i o n er recei v eda ch eckfo r $ 3 0 ,0 0 0 fro m M r. W al ker, wh ich h e d ep o s it edi n t o h i s p ers on al ch eck i ng acco u n to n No v em b er 1 0 , 2 0 0 8 . Pet i t io ners d i dn otrep o rtth e $ 3 0,0 0 0 o n t he jo i n tretu rn . Pet i t i o n er
co n ten d s t h atth e $ 3 0 ,0 0 0 was a n o n t ax ab l e g i ft . Al t h o u gh M r. W al k er co n s i d ered p et i t i o n er m o re t h an ju s th i s at t o rn ey b u tal s o a fri en d , h e wo u l d n o t h av e g i v en $ 3 0 ,0 0 0 t o p et i t i o n er i f h e h adn o trecei v edth e l u m p -s u m p aym en t.

2 Onh i s Sch edu l e C p et i t i o ner rep o rt edg ro s s recei p t s o f $ 6,5 3 0 an d ex p en s es t o t al in g $ 43 ,0 21 (i n cl u d i n g h om e o ffi ce ex p en s es o f $ 3 ,4 2 3 ).- 4
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[* 4 ] Attri al p et it i on ers d i dn o tp ro duce a fee ag reem en to r an y o t h er d o cu m en t at i o n reg ard in g p et it i o n er’ s rep res en t at i o n o f M r. W al k er. M r. W al k er p rep aredh i s o wnFed eral i n co m e t ax return fo r 2 0 0 8, d edu ct i n g t h e $ 3 0,0 0 0 p aym en tt o p et i t io n er as a l eg al ex p en se, an d h e d i dn o tfi l e a Fed eral g i ftt ax return fo r t h aty ear. II. Yach tEv en t In M arch 2 00 8 p et i t i o n er u n d erwen ts i g n i fi can tb rai n s u rg ery , fro m wh i ch h e wo u l ds pen dm

u ch o f the n ex ty ear reco v eri n g . Befo re t h e s u rg ery h e h el dan
ev en t t o wh i ch h e i nv i t ed h i s cu rren t cl i en t s , ren t i n g a y ach t fo r t h e o ccas i o n an d p ro v id i n g a cat ered d i n n er, d ri n k s , an den t ert ai n m en t , fo r t h e p u rp o s e o f d i s cu s s i n g wi t h t h e cl i en t s t h e s t atus o f t h ei r cas es , h is up co m in g s u rg ery , an dh i s
ex p ect edav ai l ab i l i t y fo l l o wi n g th e s u rg ery . Pet i t i o n er d i dn o tad v ert i s e b u tm et al l o f h i s cl i en t s th ro u gh wo rdo f m o u t h ; p et i t i o n er g ai n edn ew cl i en t s b y treat i n g h i s cu rren tcl i en ts b et t er t han m o sto t h er at t o rn ey s m i g h t t reatthem
. Th e t o tal co s t fo r t h e ev en t(as i n d i cat edb y a ren t al es t i m at e fro m

th e y ach t
ren t al co m

p an y th atp et i t i o n er p ro v i d ed ) was $ 8 , 2 8 4 co n s i s t i ng o f $ 4 ,0 7 6 fo r y ach t
ren t al an drel at edex p en ses , $ 3 ,2 0 0 fo r cat eri n g an den t ert ai n m en t , an d $ 1 ,0 0 8 fo r
a s erv i ce ch arg e an d s al es t ax . Onh i s Sch edu l e C p et i ti o n er cl ai m ed $ 4 , 4 2 1 as an ad v ert i s in g ex pen s e d edu ct i o n fo r t h e y ach tev en t
.- 5
-

[* 5 ] In th e n ot ice o f d efi ci en cy 3 res p o n d en td i s al l o wedp et i t i o n er’ s cl ai m ed ad v ert i s in g ex pen s e d edu ct i o n fo r t h e y ach tev en t b u tal l o weda d edu ct i o n o f 5 0 % (p u rs u an tt o th e s ect i o n 2 7 4 (n ) l i m i t at i o n ) fo r t h e p o rt io n o f th e ev en t co s trel at i n g t o m eal s an den tert ai n m en t . Incal cu l at i n g t h i s am o u n tres po n d en tex cl u d ed

“ l i n en s ” o f $ 1 8 0 fro m

th e cat eri n g an den t ert ai n m en tex p en s es l i s tedo n th e ren t al
es t i m at e, res u l t i n g i n res p o n d en tal l o wi n g 5 0 % o f $ 3 ,0 2 0 , o r $ 1 ,5 1 0 , as d edu ct i b l e
m eal s an den t ert ai n m en tex p en s es . 4 Pet i t i o ner p ro v i d edcred i tcards t at em en t s es t ab l i s hi n g thath e p ai d$ 3 ,8 2 1 t o the y ach tren t al co m

p an y i n M arch 2 0 0 8 b efo re t h e ev en tan d recei v eda $ 1 0 0 refu ndth ereaft er fo r an u n s p eci fi edreas o n . Inal l o wi n g p et i t i o n er t o d edu ct5 0 %
o f $ 3 , 0 2 0 fo r m eal s an d en tert ai n m en tex p en s es , res p o n den ttreat edthe $ 3 , 8 2 1 p aym en t as a m eal s an d en t ert ai n m en tex p en s e. 5

3 Dup l i cat e n o t i ces o f d efi ci en cy were ad dres s edt o p et it i on ers --o n e t o p et i t i o n er ata Kn ox v i l l e, Ten n es s ee, ad dres s an dan o t h er t o M rs . Du n can ata W es tCo v i n a, Cal i fo rn i a, ad dres s .

4 Pet i t i on er al s o rep o rt ed o n h i s 2 0 0 8 Sch edu l e C, an dres p o nd en t al l o wed , an ad di t i o n al $ 8 5 i n m eal s an den t ert ai n m en tex p en s es , fo r a t o tal al l o w ed d educt i o n o f $ 1 , 5 9 5
.

5 Res p o n d en ttreat ed th e rem ai n i n g p o rt i o n o f t h e $ 3 ,8 2 1 p aym en t($ 8 0 1 ) as n o n d edu ct i b l e faci l i t y

fees . See s ec. 2 7 4 (a)(1 )(B); s ec. 1 .2 7 4 -2 (a)(2 ), (e)(2 ), In co m e Tax Reg s .- 6
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[* 6 ] III. Paym en t s t o M s . Gu Th ro u g h o u t2 0 0 8 , b u tp art i cu l arl y fo ll o wi n g h i s s u rg ery , p et i t i o n er was
as s i s ted i n h i s l eg al p ract ice b y M ei Gu , wh o h el p edwi t h cl eri cal t as k s s uch as
m ai l p ro ces s i n g an db oo kk eep in g . M s. Guwas a p ers o n al fri en do f p et i t i o n er. 6 Onh i s Sch edu l e C p et i t i o n er d edu ct ed$ 2 3 ,5 10 as a co n tract l ab o r ex p en s e. Du ri n g the ex am i n at io n o f th e jo i ntretu rn p et it i on er ag reedthath e h adn o t p ro p erl y ch aract eri zedthe p aym en t s t o M s. Gu , an d h e i n s t eadco n t en d edth atth ey were d edu ct i bl e as “ o t h er ex p en s es ”. In th e n o t i ce o f d efi ci en cy res p o n den t d i s al lo wedp et it i o n er’ s d edu ct i o n fo r co n t ract l ab o r ex p en s es an d d idn o tal l o w
an y co rres po n d i ng i n creas e i n p et i t i o n er’ s d edu ct i o n as refl ect edo n h i s Sch edu l e C fo r o th er ex p en s es . IV. Oth er Sch edu l e C Ex p en s es Pet i t i o ner al s o rep o rt ed , an dres p o n d en t d i sal l o wedd edu ct i o n s fo r, $ 4 ,4 2 9 i n car an dtru ck ex p en ses an d$ 2 ,4 7 1 i n d ep reci at i on o n h i s Sch edu l e C. Pet i t i o n er d i dn o t i n cl u d e an y

ad di t i o n al i n fo rm at i o n reg ard in g th e rep o rt edcar an dtru ck
ex p en s es i n the s ect i on o f h i s Sch edu l e C d es ig n at edfo r s u ch i n fo rm at i o n (e.g .,

6 Pet i t i on er al s o n o t edattri al an di n co rres p on d en ce wi t h res p o n d en tth at M s . Guh as i n co rp o rat eda Nev ad a l i m i t edl i ab i l i t y co m p an y thro u g h wh i ch s h e ren d ers s erv ices , b u tal l o f t h e ch eck s en t eredi n to ev i d en ce s eem i n g ly were m ad e o u tt o h er p ers on al l y . Reg ard l es s , t o wh o m p et i t i o n er act u al l y

p ai d t he ex p en s es d o es no taffect th ei r d edu ct i b i l i t y t o h i m .- 7
-

[* 7 ] th e d at e wh en t h e cl ai m edv eh i cl e(s ) were p l aced i n s erv ice fo r b u si n es s p u rp os es o r m il eag e t rav el ed fo r b u s i n es s p u rp o ses ) an dd i d n o to t h erwi s e i d en t i fy t h e v eh i cl e(s ) fo r wh i ch h e was rep o rt i n g the ex p en s es an ywh ere el se o n th e jo i n t retu rn . Th e jo i n tretu rn i n d i cat edth atth e rep o rt edd ep reci at i o n al so p ert ai nedt o t h e u n id en t i fi edv eh i cl e(s ). Pet i t i o ner p ro v i d edcred i tcards t at em en t s refl ect i n g n u m ero u s v eh icl erel at ed ex p en s es (p ri m ari l y ch arg es atg as s t at i o n s an dau t o m o t i v e s h o p s ), b u th e d i dn o t p ro v i d e ev i d en ce t o s h o w fo r wh i ch v eh i cl e(s ) t h o s e ex p en ses were i n cu rred
. 7 Pet i t i o ner al s o rep o rt ed , an dres p o n d en t d i sal l o weda d edu ct i o n fo r, a $ 7 40 b ad d eb tl o s s as an “ o t her ex p en s e” o n h i s Sch edul e C. 8 He co n t en d s th at t h e l o s s

7 Pet i t i on ers at t ach edt o th e jo i n treturn a Sch edu l e A, It em i zed Dedu ct i o n s . Onth is Sch edul e A p et i t i o n ers cl ai m ed , an dres p o nd en tal lo wed , a d edu ct i o n o f $ 1 3 ,7 8 4 (b efo re ap p l icat i o n o f t h e 2 % fl o o r i m p o s edb y s ec. 6 7 (a)) fo r M rs . Du n can ’ s u n rei m

bu rs edem

p l o y ee ex p en s es . Th e b ul ko f th es e ex pen s es ($ 1 0 , 25 8 ) was at t ri b u t ab l e t o M rs . Du n can ’ s wo rk -rel at edu s e o f t wo v eh i cl es th at p et i t i o n ers o wn ed --a GM C Yu k o n an d a To y o t a Camry , th e fo rm er o f wh i ch th ey s o l ddu ri n g 2 0 0 8 , reco g n izi n g cap i t al g ai n .

8 Onh i s Sch edu l e C p et i t i o ner al s o cl ai m eda d edu ct i o n fo r t he fo l l owi n g ex p en s es t o t al in g $ 7,3 6 5: l eg al an dp ro fes s i o n al s erv i ces , o ffi ce ex p en s es , rep ai rs an d m ai nt en an ce, t ax es an d l i cen s es , b an k ch arg es , co u rtfi l i n g fees , d el i veryan d frei g ht , du es an ds ub s cri p t i o ns , i n t ern etacces s , jan i t ori al , l au n dry an dcl ean i n g , p ark i n g an d t o l l s, p o s to ffi ce b o x ren t al , p o s t ag e, St at e b ar du es , t el ep h o n e, an d wo rk ers ’ co m

p en s at i o n “ cen tral ”. Res p o n d en t al l o wedal l o f t h es e as d edu ct i b l e (co n ti n u ed ...)- 8
-

[* 8 ] rel at edt o a $ 7 50 l o anm ad e t o an es t ran g ed n iece an dthataft er s h e m ad e o n e p aym en t o f $ 6 0 h e n ev er h eardfro m h er ag ai n . 9 V. Ex am in at i o n o f t h e J o i n tRetu rn Res p o n d en ts el ect ed t h e jo i n tretu rn fo r ex am in at i o n an dreq u es tedth at p et i t i o n ers p ro v i d e d o cu m en t at i o n t o s up po rtthe rep o rt edSch edu l e C ex p en s es
an d cert ai n o t her i t em s o n th e jo i n t retu rn . Duri n g the ex am i n at i o n p et i t i o ners
ex ecu t edtwo Fo rm s 8 7 2 , Co ns en tt o Ex ten dth e Ti m e t o As s es s Tax
. 1 0 Th e fi rs t Fo rm 8 7 2 was s ig n edb y

p et i t io n ers du ri n g Decem b er 2 0 1 1 an db y

res p o n d en t ’ s rep res en t at i v e o n J anu ary 6 , 2 0 1 2 , ex t en d i n g t he t i m e fo r res p o nd en t t o as s es s t ax fo r 2 0 0 8 u nt i l Ap ri l 1 5 , 2 01 3 . Th e s eco n dFo rm 8 7 2 was s i g nedb y

p et i ti o n ers du ri n g No v em

b er 2 0 1 2 an db y

res p o n d en t’ s rep res en t at i v e o n No vem b er 2 6 , 2 0 1 2 , ex t en d i n g th e t i m e fo r res p o n d en tt o as s es s t ax fo r 2 0 0 8 u nt i l Decem b er 3 1 , 2 0 1 3
.

8 (...co n t in u ed ) ex p en s es an d d o es n otch al l en g e t h ei r d edu ct i b i li t y h ere. 9 Onb ri ef p et i t i o n ers co n ced e th ati f al l o wed , th ei r d edu ct i o n fro m th i s l o s s s h o u ldb e o n l y

$ 6 9 0
. 1 0 Becau s e p et i t i o n ers t i m el y fi l edth e jo i n treturn , i f th ey h adn o tg ran t ed s u ch co n s en t s , th e t hree y ear s tatu t o ry p eri o d o f l i m i t at i o n s o n as s es sm en to f t ax fo r 2 0 0 8 wo u l dh av e ex p i red o n Ap ri l 1 5 , 2 0 12 . See s ec. 6 5 0 1(a) an dthe d i s cu s s i o n i n fra p p . 9 -1 3
.- 9
-

[* 9 ] Res p o n d en ti s su eddupl icat e n o t i ces o f d efi ci en cy t o p et i t i o n ers o n Au g u st 2 2 , 2 0 1 3 . OnNo vem

b er 1 3, 2 01 3 , p et i t i o n ers t i m el y fi l edth ei r p et i t i o n wi t h th e Co u rt
. OPINION I. St atu t o ry

Peri o do f Li m i t at i o n s To As s es s Tax As a p rel i m i n ary

m at t er we ad dres s p et i t i o n ers ’ arg u m en tth atres po n d en t i s su edth e dupl i cat e n o t ices o f d efi ci en cy aft er t he s t atu t o ry

p eri odo f l i m i t at i o n s t o as s es s t ax h adex p i redan dth at t h u s res p o nd en ti s b arred fro m as s es s i n g an y i n co m e t ax d efi ci en cy fo r 2 0 0 8
. Sect io n 6 2 1 3 (a) g en eral l y req u i res th e Co m

m i s s i o ner t o i ss ue a n o t ice o f d efi ci en cy

b efo re as s es s i n g a d efi ci en cy i n Fed eral i n co m e t ax ag ai ns ta t ax p ay er. Wh en a t ax p ay er h as fi l eda retu rn , s ect i o n 6 5 01 (a) g en eral l y req u ires th e Co m m i s s i o n er t o as s es s a d efi ci en cy i n Fed eral i n co m e t ax wi t h i n th ree y ears aft er t h e ret urn was fi l ed . Hen ce, u n d er t h es e g en eral ru l es , the Co m m i ss i on er m ay i s su e a n o t i ce o f d efi ci en cy t o a t ax p ay er o n l y wi t h i n th e s am e p eri o d
. Sect io n 6 5 0 1 (c)(4 ) au t ho ri zes a t ax pay er an dth e Co m m is si o n er t o ag ree i n wri t in g t o ex ten dth e p eri odo f l i m it at i on s o n as s es s m en t an dth ereb y ex t en dth e p eri o di n wh i ch th e Co m m i s si o n er m ay

i s s ue a n o t i ce o f d efi ci en cy . An ag reem en treach edu nd er t hi s s ect i o n i s n o ta co n t ract (rat h er, i ti s a u n i lat eral- 1 0 -

[* 1 0 ] wai v er o f a d efen s e b y t h e t ax p ay er), b utco n t ractp ri n ci p les are u s efu l i n i n t erp ret i n g s u ch ag reem en ts an d , i n p art icu l ar, en su ri n g th at s uch ag reem en t s refl ecta “ m an i fes t at i o n o f m utu al as s en t .” Pi aru l le v . Co m m i s s io ner, 8 0 T.C. 1 0 3 5 , 1 0 4 2 (1 98 3 ) (fi rs tci t in g St an ge v . Un i t edSt at es , 2 8 2 U.S. 2 7 0 (1 9 3 1 ); th en ci t i n g Tal l al v . Co m

m i s s i o n er, 7 7 T.C. 1 2 9 1 (1 98 1 )). J u s t as an ag reem en tt o ex t en dthe p eri odo f l i m i t at i on s o n as s es s m en tm u s t b e m ad e i n wri t i n g , an y

co n d i t i o n , l i m i tat i on , o r m o d i fi cat i o n o f s u ch an ag reem en tm

u stal s o b e m ad e i n wri t i n g , ei t h er d i rect l y i n th e ag reem en t o r i n a
s ep arat e b u t co n t em

p o ran eo u s d o cu m en t. See Sch u l m anv . Co m m i s s i o n er, 9 3 T.C. 6 2 3 , 6 3 9 -6 42 (1 9 8 9) (an dcas es ci t ed t h ereat ). Wh en th e Co m m i s si o n er p ro duces a wri t t en ag reem en t ex t en d i n g th e p eri o do f l i m it at i o n s o n as s es s m en t t h atap p ears v al i dan du n res t ri ct edo n i t s face, t h e t ax p ay er b ears th e b u rd eno f p ro v in g o t h erwi s e, i .e., th e t ax p ay er m us ts h ow t h atth e ag reem en ti s i n v al ido r, i f
co n ten d in g th atth e ag reem en t was res t ri ct ed , th atth e cl ai m edres t ri ct i o n was redu ced to wri ti ng . Kro n i s h v . Co m m i s s io n er, 9 0 T.C. 6 8 4 , 6 9 2 -6 9 3 (1 9 8 8 ); s ee al s o Cro wn W il l am et t e Pap er Co . v . M cLau g h l i n , 8 1 F.2 d3 6 5 , 3 6 7 (9 t h Ci r. 1 9 3 6 ). Res p o n d en tp ro du cedtwo co n s en tfo rm s (Fo rm s 8 7 2 ) wi t h res p ectt o p et i t i o n ers ’ 2 0 08 t ax ab l e y ear. Th e fi rs tco ns en tfo rm ex t en d edth e p eri o do f- 1 1 -

[* 1 1 ] l i m i t at i o n s o n as s es s m en tt o Ap ri l 1 5 , 2 0 13 . Th e s eco n d co n s en tfo rm , ex ecu t edb efo re t he ex p irat io n o f t h e p rev i o u sl y ex ten d ed d at e o f Ap ri l 1 5 , 2 0 1 3 , fu rt her ex t en d edth e p eri o do f l i m i t at i o n s o n as s es sm en tt o Decem b er 3 1 , 2 0 1 3
. Pet i t io n ers d o n otd i sp u t e t h at t h ey s i g n edth e fo rm s. Pet i t i o n ers arg u e, h o wev er, t h atth e co ns en t fo rm s are i n v al i db ecau s e th ey were co erced b y

res p o n d en ti n t o
s i gn i n g th em

an d b ecau s e res p o n d en t t h ereaft er i g n o redcert ai n ag reedres t ri ct i o n s
o n wh i ch thei r co ns en t s were p rem i s ed
. W e fi n dp et i t i on ers ’ arg u m en t s u np ers uas i v e. Pet i t i o n ers ’ co erci o n cl ai m i s fo u n dedo n res p on d en t’ s warn in g th atfai l u re t o ex t en dth e p eri odo f l i m i t at i o n s o n
as s es s m en two u l dres u l t i n th e i s s u an ce o f a n ot i ce o f d efi ci en cy o n t h e b as i s o f i n fo rm at i o n o b t ai nedthu s far du ri n g th e ex am i n at i o n . In cas es i n v o l vi n g s i m i l ar fact ual s itu at i o n s t h i s Co u rth as co n s is t en t l y h el dth at i ti s n otco erci on o n th e Co m m i s s i o n er’ s p art m erel y

t o d es cri b e t h e “ l awfu l m ean s p ro v i d edb y t he s t atut e t o as s es s an d co l l ectth e t ax ” i f t h e t ax p ay er d ecl in es t o s i g n a co n s en t t o ex t en d t h e p eri o do f l i m i t at i on s o n as ses s m en t
. M u l fo rdv . Co m m i s s i o n er, 2 5 B.T.A. 2 3 8 , 2 4 2 -2 4 3 (1 9 3 2 ) (ci ti n g Bu rn etv . Ch i . Ry . Equ i p . Co ., 2 8 2 U.S. 2 95 (1 9 3 1 )), aff’ d , 6 6 F.2 d2 9 6 (3 d Ci r. 1 9 3 3); s ee Sh i rem an v . Co m m i s s io ner, T.C. M em o . 2 0 0 4
- 1 5 5 ; Bal l ardv . Co m

m is s i o n er, T.C. M em o. 1 9 8 7 -4 7 1 , aff’ d , 8 5 1 F.2 d3 5 9 (5 t h Ci r. 1 9 88 ); Pri ce v . Co m

m i s s i o n er, T.C. M em o. 1 9 81 -6 9 3 , aff’ dwi t h o u t p ub l i s h ed- 1 2 -

[* 1 2 ] o p i n i o n , 7 4 2 F.2 d 1 4 6 0 (7 t h Ci r. 1 9 8 4 ). Bu t cf. Di es ch er v . Co m m i s s i o n er, 1 8 B.T.A. 3 5 3 (1 9 2 9 ) (h o l d i ng th ata t h reatt o as s ertu n ju s t i fi edfrau dp en al t i es
u n l es s t ax p ay er s ig nedco n s en td i dco n s t i tu t e du res s i n v al id at in g ag reem en t ). W e
s ee n o di s t i n ct i o n b et ween th o s e cas es an dth i s o n e an d h av e n o reas on t o reach a d i fferen t co n cl u s i o n . 1 1 Far fro m b ei n g co erci v e, res p o n den twas actu al l y
ex p lai n i n g t o p et i t i o n ers wh y ex t en d in g th e p eri o d o f l i m i tat i o n s o n as ses s m en t g en eral l y wo rk s i n a t ax p ay er’ s fav o r, al l o wi n g the Co m m i ss i o n er m o re t i m e t o
ex am i n e t h e t ax p ay er’ s retu rn s an dal lo wi n g the t ax p ay er m ore t im e t o p ro v i d e d o cu m en t s i n s up p o rto f h i s cas e an dp o t en ti al l y reach an am i cab l e co n cl u s i o n . Pet i t i o ners al s o co n t en dth atthei r wri t t en co ns en t s were co n di t i o n edo n h av in g th e In t ern al Rev enu e Serv i ce (IRS) rev en ue ag en th an d l i n g t h ei r

1 1 Pet i t i o ners rel y

p ri m ari l y o n Nat ’ l Fed ’ n o f In d ep . Bu s . v . Seb el i u s , 5 6 7 U.S. 5 1 9 , 5 7 7 -5 78 (2 0 1 2) (q uo t i n g St ewardM ach . Co . v . Dav i s , 3 0 1 U.S. 5 4 8 , 5 9 0 (1 93 7 )), i n wh i ch th e U.S. Sup rem e Co u rth el dth at Co n gres s co u l dn o tu s e “ fi n an ci al i n du cem en t s ” t o “ ex erta ‘ p o wer ak i n t o u ndu e i n fl u en ce’ ” an d “ co erce” St at e g o v ern m en t s i n t o t ak i n g cert ai n act i on s . Th i s cas e i s wh o l l y i n ap p o s i t e, n o t ju s t b ecau s e p et it i o n ers are n ota St at e g o vern m en tan dres p o n d en ti s n o t Co n g res s , b u tb ecau s e res p o nd en twas fu l l y wi t h in h i s s tatu to ry au t h o ri t y t o i s s u e a n o t i ce o f d efi ci en cy

t o p et i t i o n ers refl ect i n g th e am o u n to f t ax fo r wh i ch res p o n d en t b el iev edp et i t io ners were l i ab l e atan y t im e duri n g t h e ex am i n at i o n . Th ati s , the reco rdd o es n o trefl ect --an dp et i t i o n ers d o n o tal l eg e--t h atres p o n d en t t h reat en ed t o i m

p os e an y ad di ti o n al t ax o r p en al t ies o n p et i ti o n ers b ey o n dth atfo r wh i ch th ey

were al read y

l iab l e (as we h el di m

p erm i s s i b l e i n Di es ch er v . Co m m i s s i o n er, 1 8 B.T.A. 3 5 3 (1 9 2 9 )), an dth u s th ere was n o fi n an ci al p res s u re o n p et i t i o n ers (i n d eed , as d i s cu s s edi n th e t ex t , ex t en di n g t h e p eri o d o f l i m i t at i o n s o n as s es s m en tfo r 2 0 0 8 was actu al l y i n th ei r i n t eres t ).- 1 3 -

[* 1 3 ] ex am i n at i on rem o v edfro m th e ex am i n at i o n an d g et t i ng an o p p ortu n i t y t o ch al l en g e res p on d en t’ s fi nd i n g s fro m th e ex am i n at i on b efo re t h e IRS Offi ce o f Ap p eal s. Pet i t i o n ers ’ arg u m en tco n cl u d es th at res p on d en td i d n otco m p l y wi t h ei t h er co n d i ti o n , th u s i n val i d at in g th ei r co n s en t s . Onth e b as is o f o u r rev i ew o f t h e co n sen tfo rm s we fi n dthatth ey d o n o t refl ecta wri t t en am en d m en t o r m o d ifi cat i o n m an i fes t in g t h e co nd i t io n s p et i t i o n ers ad v an ce. Pet i t i o n ers d i dn o tp res en tan y ev i d en ce t o th e co n traryattri al
. 1 2 Co n s equ en t l y , we h o l dth atb o t h co n s en t fo rm s were v al i dan du n res t ri ct edan d t h atth erefo re t h e dup l i cat e n o t i ces o f d efi ci en cy , h av i n g b een i s s u edb efo re t h e
ex p irat i o n o f t h e s eco n dco n s en tfo rm , were t i m el y . II. Bu rd en o f Pro o f In g en eral , th e Co m

m i s s i o n er’ s d et erm i n at i o ns s etfo rt h i n a n o ti ce o f d efi ci en cy

are p res u m edco rrect , an dth e t ax p ay er b ears th e b u rd en o f p ro v i n g
o t h erwi s e. Ru l e 1 4 2 (a)(1 ); W el ch v . Hel v eri n g, 2 9 0 U.S. 1 11 , 1 15 (1 9 3 3 ). Fo r t h i s p res u m

p ti on t o ad h ere i n cas es (s u ch as th is o n e) i n v o l v in g u nrep o rt ed

1 2 Pet i t i o ner’ s o ral s t at em en tth atres p o nd en t ag reedt o s u ch co n d i ti o n s was n o tm ad e u n d er o at h an dwas m erel y p et i ti o n er’ s arg u m en tattri al
. Ev en i f p et i t i o n er h adm ad e h i s s t at em en tu n d er o at h , “ [a] s we h av e s tat edm an y t i m es b efo re, t h i s Co u rt i s n o t b o u n dt o accep ta t ax p ay er’ s s el f-s erv i n g , u n v eri fi ed , an d u n d o cu m en t edt es t im o ny .” Sh ea v . Co m m i s si on er, 1 1 2 T.C. 1 8 3 , 1 8 9 (1 9 9 9 ) (ci t i n g To k ars k i v . Co m

m i s s i o ner, 8 7 T.C. 7 4 , 7 7 (1 9 86 )).- 1 4 -

[* 1 4 ] i n co m e, t h e Co m

m i s s i on er m

u stp ro v i d e s o m e reas o n ab l e fo u nd at i o n
co n nect in g th e t ax p ay er wi t h th e i n co m e-p ro du ci n g act iv i t y . See W ei m ers k i rch v . Co m m i s s i o n er, 5 9 6 F.2 d3 5 8 , 3 6 0 -3 6 1 (9 th Ci r. 1 97 9 ), rev ’ g 6 7 T.C. 6 7 2 (1 9 7 7). On ce t h e Co m

m i s s io n er h as d o n e t h i s , th e b u rd en o f p ro o f s h i ft s t o t h e t ax p ay er t o p ro v e b y a p rep on d eran ce o f t h e ev id en ce t h atth e Co m m i s s i o n er’ s d et erm in at i o n s are arb i t raryo r erro n eo us . Hel v eri n g v . Tay lo r, 2 9 3 U.S. 5 0 7 , 5 1 5 (1 9 3 5 ). It is u n d i s pu t ed t h atdu ri n g 2 0 0 8 p et i ti o n er was a l i cen sedan dp ract i ci n g at t o rn ey , an dh e rep o rt edth ati n co m e-p ro du ci n g act i v i t y o n a Sch edu l e C. Iti s al s o u n d i s p u t edth atp et i t io n er recei vedan dd ep o s it edi nt o h i s p ers o n al ch eck i n g
acco u n t a $ 3 0 ,0 0 0 ch eckfro m M r. W al k er, wh o p et i t i o n er h ad rep res en t edi n a l aws u i t . Res po n d en t al s o p ro du ceda co p y o f t h e d ep os i t edch eck . Onth e b as i s o f t h i s cred i b l e an du n d i s p u t edev i d en ce, we are s at i sfi edth atres p o n d en th as p ro v ed a l ik el y s o u rce o f t h e u n rep o rt edi n co m e. Th u s , as t o th e u n rep o rt edi n co m e, t h e b u rd eno f p ro of s h i ft s t o p et i t i o n er t o s h ow t h atres p o n d en t ’ s d et erm i n at i o n i n th i s reg ardwas arb it raryo r erro n eo u s . 1 3

1 3 Pet i t i o ners d o n ot o t h erwi s e co n t en d t h atth e b urd en o f p ro o f s h o ul ds h i ft t o res p o n d en tu n d er s ec. 7 4 91 (a), n or h av e th ey es t ab li s hedth atth e requ irem en t s fo r s h i ft i n g th e b u rd en o f p ro o f h av e b een m et . Acco rd i n g l y , th e b u rd eno f p ro o f rem ai n s o n p et it i o n ers .- 1 5 -

[* 1 5 ] III. Bu s i n es s In co m e Ad ju s t m en t A t ax p ay er’ s g ro s s i nco m e i n cl u des “ al l i n co m e fro m wh at ev er s o urce d eri v ed ,” i ncl ud in g “ [c] o m p en s at i o n fo r s erv i ces ” an d “ [g ] ro ss i n co m e d eri v ed fro m b u si n es s ”. Sec. 6 1 (a)(1 ) an d(2 ). Ho wev er, g ro s s i n co m e d o es n o ti n cl u d e

“ t h e v al ue o f p ro p ert y

acq u i redb y

g i ft ”. Sec. 1 02 (a). Th e U.S. Sup rem e Co u rtad dres s ed t h e m ean in g o f “ gi ft ” (fo r p u rp o s es o f
s ect i on 2 2 (b )(3 ) o f t h e In tern al Rev en u e Co d e o f 1 9 3 9 , a p red eces s or t o s ect i o n 1 0 2 ) i n Co m

m i s s i o n er v . Dub ers t ei n , 3 6 3 U.S. 2 7 8 , 2 85 -2 8 6 (1 9 6 0 ) (fn . ref.
o m it t ed ), as fo l l ows : [T] h e s t atu t e d o es n o tu se t h e t erm “ g i ft ” i n t h e co m

m o n -l aw s en s e, b u ti n a m o re co l l o qu i al s en s e. Th i s Co u rth as i n d i cat edth at a v o l u n t ari l y

ex ecu tedtran s fer o f h i s p ro p ert y b y o n e t o an o t h er, wi t h ou tan y

co n s id erat i o n o r co m

pen s at i o n th erefo r, th ou g h a co m m o n -l aw g i ft , i s n o tn eces s ari l y a “ g i ft ” wi t h in the m ean i n g o f t h e s t atu t e. Fo r th e Co u rth as s h o wnth atth e m ere ab sen ce o f a l eg al o r m o ral o b l i g at i o n t o m ak e s u ch a p aym en t d o es n o t es t ab l i s h t h ati ti s a g i ft . Ol d Co l o n y

Tru s tCo . v . Co m

m i s s i o n er, 2 79 U.S. 7 1 6 , 7 3 0 [(1 9 29 )] . An d , i m

p o rt an t l y , i f t h e p aym en t p ro ceed s p ri m ari l y fro m “ t h e co n s trai ni n g fo rce o f an y m o ral o r l eg al du t y ,” o r fro m “ t h e i n cen t i v e o f an t ici p at edb en efi t ” o f an eco n om i c n atu re, Bo g ardu s v . Co m m is s i o n er, 3 0 2 U.S. 3 4 , 4 1 [(1 93 7 )] , i ti s n o ta g ift . An d , co n v ers el y , “ [w] h ere t h e p aym en ti s i n retu rn fo r s erv i ces ren d ered , i t i s i rrel ev an t th at t h e d o n o r d eri ves n o eco n o m i c b en efi tfro m i t .” Ro b ert s o n v . Un i t edSt at es , 3 4 3 U.S. 7 1 1 , 7 14 [(1 9 5 2 )] . A g i fti n t h e s t atu t o ry s en s e, o n th e o t h er h an d , p ro ceed s fro m a “ d et ach edan d d i s i n t eres t ed g en ero s i t y , ” Co m m is si o n er v . Lo Bu e, 3 5 1 U.S. 2 43 , 2 4 6 [(1 9 56 )] ; “ o u to f affect i o n , res p ect , ad m irat i o n , ch ari t y o r l i k e i m p u l s es .” Ro b ert s o n v . Un i t ed St at es , s upra, at 7 1 4 . An d i n th i s- 1 6 -

reg ard , th e m o s t cri t i cal co n s i d erat i o n , as th e Co u rtwas ag reedi n th e l ead in g cas e h ere, i s th e t ran s fero r’ s “ in t en t i o n.” Bo g ardu s v . Co m m is s i o n er, 3 0 2 U.S. 3 4 , 4 1 . * * * Becau s e i nt en ti s t h e “ m o s t cri t i cal co n s id erat i o n ”, i d. at 2 85 , d et erm i n i n g wh et h er a t ran sfer o f p ro p ert y i s a g i fti s a h i gh l y

fact ual i n qu i ry

“ t h atm us tb e reach edo n co ns i derat i on o f al l th e fact o rs ”, i d . at 2 88 ; s ee W o o dy v . Un i t ed St at es , 3 6 8 F.2 d6 6 8 , 6 7 0 -6 7 1 (9 t h Ci r. 1 9 6 6 ). Th i s i n qu i ry fo cu s es up o n
o b ject i ve i n d i ci a o f t h e t ran s fero r’ s i n t en tfro m t he wh o l e ev i den t i ary reco rdan d d o es no tm erel y

rel y o n th e t ran s fero r’ s o wn s tat em en t s. To th i s en d , th e Sup rem e Co u rti n Co m

m i s s i o n er v . Dub ers t ei n , 3 6 3 U.S. at2 8 6 , s t at ed : Th e Go v ern m en ts ay s t h atth i s “ i n t en t i o n ” o f t h e t ran s fero r can n o tm ean wh atth e cas es o n th e co m m o n -l aw co ncep to f g i ftcal l
“ d o n at i v e i n ten t .” W i t h th atwe are i n ag reem en t , fo r o u r d eci si on s fu l l y s up p o rtth i s. M o reo v er, t h e Bo g ardu s cas e i t s el f m ak es i t p l ai n t h atth e d o n o r’ s ch aract eri zat io n o f h i s act i o n i s n o td et erm i n at i v e-- t h atth ere m

u s t b e an o bject i v e i n qu i ry as t o wh et h er wh ati s cal l eda g i ftam o u n t s t o i ti n real i t y . 3 0 2 U.S., at4 0 . It s carcel y n eed s ad di n g t h atth e p art i es ’ ex p ect at i o n s o r h o p es as t o th e t ax treat m en to f t h ei r co n du cti n th em s el v es h av e n o th i ng t o d o wi t h t h e m at t er. W e t ak e i tth atth e p ro per cri t eri on , es t ab l i s h edb y d eci s i on h ere, i s o n e t h at i n qu ires wh atth e b as i c reas o n fo r h i s co n du ctwas i n fact

-- t h e d o m i n an treas o n t h atex p l ai n s h i s act i o n i n m ak i n g the t ran s fer. * * * Acco rd in g ly , o n ce we es t ab l i s h as a fact u al m at t er th e d o m i n an t reas o n fo r t h e t ran s fer, d et erm i n in g wh et h er t h atreas o n ju s t i fi es n o n t ax ab l e t reat m en tu n d er [* 1 6 ]- 1 7 -

[* 1 7 ] s ect i o n 1 0 2 i s a l eg al qu es t i o n . Ol k v . Un it ed St at es , 5 36 F.2 d 8 7 6 , 8 7 8 -8 7 9 (9 t h Ci r. 1 9 7 6 ); s ee al s o Pl o t i n s ky v . Co m m i s s i o n er, T.C. M em o . 2 0 0 8 -2 4 4 , s l i p
o p . at1 1 -1 7 (an al y zi ng an dap pl y i n g Dub ers t ei n). Dub ers t ei n draws an i m

p o rt an td i s t i n ct i o n --a g i ftm ad e o u t o f g en ero s i t y o r ch ari t y i s n o tt ax ab l e u n d er s ect i o n 1 02 , b u to n e m ad e o u to f g rat i tu d e, p art i cu l arl y g rat i tu d e s t emm i ng fro m

a p ri o r eco n o m i c o r co m m erci al rel at io n sh i p , i s t ax ab l e. See Co m m i s s i on er v . Dub ers tei n , 3 6 3 U.S. at2 8 7 . In t hatcas e M r. Dub ers t ei n
was a b u s i n es s m an wh o m ai n t ai n eda co rd i al rel at i o n s h i p wi th o n e o f h i s
s up p li ers , M r. Berm an , fro m wh o m h e m ad e reg u lar p u rch as es an dt o wh o m h e p ro v id edl ead s fo r n ew cu s t o m ers . Id . at2 8 0 . M r. Dub ers t ei n n ev er as kedfo r o r recei v edco m

p en s at i o n fo r t h e l ead s, b utaft er s ev eral y ears M r. Berm an fel t i n cl i n edt o g i v e h im

s o m et h i n g i n retu rn fo r h i s as s i s tan ce. Id . He b o u gh tM r. Dub ers tei n a b ran d n ew Cad i l lac; an dal t ho u g h M r. Dub ers t ei n i n it i al ly p ro t es t ed , h e ev en tual l y

accep t edth e car. Id . at 2 80 -2 8 1. Th e Sup rem e Co urtn o t edth atM r. Berm an ’ s co m

p an y ap p aren t l y d edu ct edth e co s t o f t h e car as a b u s in es s ex p en s e
o n i t s Fed eral co rp o rat e i n co m e t ax retu rn . Th e Sup rem e Co u rtal s o n o t ed t h atM r. Dub ers tei n t es ti fi edth at , al t h o u g h h e reg ard edth e car as a n o n tax ab l e g i ft , h e h ad
n o reas o n t o th i n kM r. Berm an wo ul dh av e g i v en i t t o h i m h adh e n o tp ro vi d ed h i m wi t h th e l ead s . Id . at2 8 1 . Ul t i m at el y , th e Sup rem e Co u rtup h el d t h i s Co u rt ’ s- 1 8 -

[* 1 8 ] ru l i n g , Dub ers t ei n v . Co m m i s s i o n er, T.C. M em o . 1 9 5 8 -4 (an drev ers edthe
ru l i n g o f t h e U.S. Co u rto f Ap peal s fo r t h e Si x th Ci rcu i t , 2 6 5 F.2 d 2 8 (6 t h Ci r. 1 9 5 9 )), h o ld i ng th atth e car was t ax ab l e i n co m e t o M r. Du b ers tei n . Th e Sup rem e Co u rts t at ed : It seem s t o u s p l ai n th atas tri er o f t h e fact s * * * [t h e Tax Co u rt ] was warran t edi n co n cl u d i n g th atd es p i t e t h e ch aract eri zat io n o f th e t ran s fer o f t h e Cad il l ac b y th e p art i es an d t h e ab s en ce o f an y o b l i gat i o n , ev en o f a m o ral n atu re, t o m ak e i t , i twas at b ot t o m a reco m p en s e fo r Dub ers t ei n ’ s p as ts erv i ces , o r an i n du cem en tfo r h i m t o b e o f fu rt h er s erv i ce i n th e fu tu re. * * * Co m m i s s i o n er v . Dubers t ei n , 3 6 3 U.S. at2 91 -2 9 2
. Bo t h p art i es rel y

o n Dub ers t ei n fo r t h ei r ch aract eri zat io n o f th e ch eck p et i t i o n er recei v edfro m

M r. W al k er. Pet i t i o n ers arg u e t h atM r. W al k er g av e p et i t i o n er $ 3 0 ,0 00 o ut o f d is i n t eres t edg en ero s it y res ul t i n g fro m

a p ers o n al rel at i o n s h i p t o wh i ch p et i t i o n er’ s rep res en t at i o n o f M r. W al k er i n h i s l aws u i t ag ai n s tth e ci t y

o f Hu n t in gt o n Park , Cal i fo rn i a, an dCal PERS was i nci d en t al
. Res po n d en targ u es th e co n vers e--t h atev en i f p et i t i o n er an dM r. W al k er d ev el o p ed a p ers o n al rel at i on s hi p o v er t i m e, t h ei r p ri m ary rel at i o n s h ip was th ato f l awy er an d cl i en t, an d M r. W al k er g av e p et i t i o n er $ 3 0 ,0 0 0 o u t o f h is p ro ceed s (ex ceed i n g $ 3 6 0 ,0 0 0 ) fro m

th e l aws u i t as co m

p en s at i o n fo r t h atrel at i on s hi p .- 1 9 -

[* 1 9 ] Pet i t i o ners arg ue t h atth ere was n o b i n di n g co n t ract o r l eg al o bl i g at i o n req u i ri n g M r. W al k er t o m ak e t h e p aym en t , wh i l e res p on d en targ u es th at M r. W al k er’ s d edu ct i o n o f t h e p aym en tas a l eg al ex p en s e o n h i s o wnFed eral t ax retu rn b et t er d em on s trat es h i s i n t en t . Iti s n o tedth ati n Dub ers t ei n (an d
s ub s equ en tcas es ) t h e ex i s t en ce o f a p ers o n al rel at io n sh i p b et ween a d o n o r an da d o n ee, t he l acko f m o ral o r l eg al o b l i g at i o n o n the d o n or t o m ak e a p aym en t , an d t h e d o no r’ s t ax treat m en to f the p aym en t , each s t an d i n g al o ne, were al l d eem ed i rrel ev an to r s ub o rd i n at e co n s id erat i o n s . In s t ead , th e ch aract eri zat i o n o f a t ran s fer d ep en d s o n th e fact -fi n d er’ s p ercep t i o n i n th e l i g hto f al l t h e ev id en ce. Aft er wei g h i ng th e ev id en ce i n th e reco rd , i n cl u d i n g M r. W al k er’ s t es t i m o ny , we h o l d t h atM r. W al ker g av e $ 30 , 0 0 0 t o p et i t i o n er p ri m ari l y o u to f g rat i tu d e fo r p et i t i o n er’ s s erv i ces i n rep res en t i n g h i m an db ri n g i n g t h e l aws ui tt o a s u cces s fu l
co n cl u s i o n aft er 1 4 y ears . W e fi n dm o s t p ers u as i v e as cl ear i n di cat i on s th atM r. W al k er was n o tm ak in g a g i ftt o p et i t i o n er t h e fact s that(1 ) h e wo u l dn o th av e g i v en $ 3 0 ,0 0 0 t o p et i t io ner b u tfo r h i s recei p t o f t he l u m p -s u m p aym en tex ceed i n g $ 3 6 0 ,0 0 0 fro m

th e l aws ui tan d(2 ) h e d edu ct edth e $ 3 0,0 0 0 o n h i s Fed eral i n co m e t ax return . Th e fact s i n th i s cas e i n m an y way s m im i c t h e fact s o f Dub ers t ei n --ev en t h o u g h p et i t i o ner d i dn o ts o l i ci ti t , th e p aym en t fro m M r. W al ker ap p ears i nt en d ed- 2 0 -

[* 2 0 ] as co m

p en s at i o n fo r a jo b wel l d o ne (ak i n t o a t i p o r g ratu i t y fo r ex cep t i o n al
s erv i ces ren d ered ) an dm u ch m o re d i rect l y

s o th ani n m an y

cas es i n wh ich we h av e s im i l arl y

h el d . Cf. Ol k , 5 3 6 F.2 d8 7 6 (h o ld i n g t h ats m al l g ratu i t i es g i v en b y g am b l ers t o cas i n o em

p lo y ees , th o u g h l arg el y

dri v en b y

s up ers t i t i o n , were
n o n et h el es s co nn ect edt o s erv ices ren d eredan dth u s t ax ab l e i n co m e). W e s u s t ai n res p o nd en t ’ s d et erm i n at i o n t hatp et i t i o n er h adad di t i o n al b u s i n es s i n co m e fo r 2 00 8 o f $ 30 ,0 0 0
. IV. Bu s i n es s Ex p en s e Dedu ct i o n Ad ju st m en t s Bu s i n es s ex p en s e d edu ct i o n s , l i k e al l t ax d edu ct i o n s, are a m at t er o f l eg i s lat i v e g race, an dthe t ax p ay er b ears th e b urd en o f p ro v i n g h i s en t i t l em en tt o
an y d educt i o n. INDOPCO, In c. v . Co m m i s s i o n er, 5 0 3 U.S. 7 9 , 8 4 (1 9 9 2 ); New Co l on i al Ice Co
. v . Hel v eri ng , 2 9 2 U.S. 4 3 5 , 4 4 0 (1 9 3 4 ). Th i s b u rd en req u i res th e t ax p ay er t o d em on s t rat e t h at t h e cl ai m ed d edu ct i on s are al lo wab l e p u rs u an tt o
s o m e s t atu t o ry

p ro v i si o n an dt o s ub s t an t i at e t he ex p en s es g i v i n g ri s e t o th e cl ai m edd edu ct i on s b y

m ai n t ai n i n g an dp ro du ci n g ad equ at e reco rd s th aten ab l e t h e Co m m i s s i o n er t o d et erm i ne t h e t ax p ay er’ s co rrectl iab i l i t y . Sec. 6 0 0 1; Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. 4 3 8 , 4 4 0 (2 0 0 1). Sect io n 1 6 2 al l o w s a t ax p ay er t o d edu ctal l o rd in ary an dn eces s ary ex p en s es p ai do r i n cu rred du ri n g th e t ax ab l e y ear i n carry i n g o n a t rad e o r b u s i n es s . Sec.- 2 1 -

[* 2 1 ] 1 6 2 (a); s ec. 1 .1 6 2 -1 (a), In co m e Tax Reg s. An ex p en se i s “ o rd i n ary ” i f i ti s

“ n o rm al , u s u al , o r cu s t o m ary ” i n th e t ax p ay er’ s trad e o r b u s in es s o r ari s es fro m a t ran s act io n “ o f co m

m o n o r freq u en to ccu rren ce i n the t y p e o f b u s i n es s i n v o l v ed .” Dep ut y v . du Po n t , 3 0 8 U.S. 4 8 8 , 4 9 5 (1 9 4 0 ). Anex p en s e i s “ n eces s ary ” i f i ti s

“ ap p ro p ri at e an dh el p fu l ” t o th e t ax pay er’ s b u s i n es s , b uti t n eedn o tb e ab s o l u t el y
es s en t i al . Co m

m i s s i o n er v . Tel l i er, 3 8 3 U.S. 6 8 7, 6 8 9 (1 9 6 6) (q uo t i n g W el ch v . Hel v eri n g , 2 9 0 U.S. at1 1 3 ). In co n t ras ta t ax p ay er m ay n o td educta p ers on al , l i vi n g, o r fam i l y

ex p en s e u n l es s th e In t ern al Rev en u e Co d e ex p res s l y p ro v i d es
o t h erwi s e. Sec. 2 6 2(a). Th e d et erm i n at io n o f wh eth er an ex pen s e s at i s fi es th e req u i rem en t s o f s ect i o n 1 6 2 i s a qu es ti o n o f fact . Cl o u dv . Co m m i s s i o n er, 9 7 T.C. 6 1 3 , 6 1 8 (1 9 9 1) (ci ti n g Co m m i s s i o n er v . Hei n in g er, 3 2 0 U.S. 4 67 , 4 73 -4 7 5 (1 9 4 3)). Pet i t i o ners co n t en dth atth ey are en t i t l edt o d edu ctth e p aym en ts p et i t i o n er
m ad e t o M s . Gu as o rd i n ary an dn eces s ary b u s i n es s ex p en s es . Th ey d o n o t
co n ten d , h owev er, th atth e p aym en t s were fo r s erv i ces th atM s . Gup erfo rm ed
. M o reo v er, p et i t i o n ers were u n ab l e t o cat eg o ri ze t hes e ex p en s es o r s ub s t an t i at e t h em wi th d ocu m en t s o t h er t h an th e ch eck s p ro du ced . Al t h o ug h s o m e o f t h e
am ou n t s p ai dt o M s . Gum ay h av e rep res en t edb u s i nes s ex p en s es , p et it io n er h as fai l edt o k eep ad equ at e b o o k s an dreco rd s o r t o p res en t o t h er ev i d en ce t o- 2 2 -

[* 2 2 ] s ub s t an t iat e t hes e ex pen s es . Co n s equ en t l y , we s u st ai n res po n den t’ s d i s al lo wan ce o f t h i s d educt i o n i n fu l l
. Fo r cert ai n b u si n es s ex p en s es , Co n g res s ex pl i ci t l y req u i res a h ig h er (i .e.,
s t ri ct er) l ev el o f s ub s tan t i at i o n . See San fo rdv . Co m m i s s i o n er, 5 0 T.C. 8 2 3, 8 2 7 (1 9 6 8), aff’ dp er cu ri am , 4 1 2 F.2 d2 0 1 (2 dCi r. 1 9 69 ); s ec. 1 .2 7 4 -5 T(a), Tem p o raryIn co m e Tax Reg s ., 5 0 Fed . Reg . 4 6 01 4 (No v . 6 , 1 9 8 5 ) (fl us h l an g u ag e). Su ch ex p en s es are t h o se s p eci fi edi n s ect io n 2 74 , s u ch as trav el (i ncl ud i ng m eal s an dl o d gi ng ), en t ert ai n m en t , an d“ l i s t edp ro pert y ” (i n cl u d i n g p as s en g er au t o m o b il e) ex p en s es . 1 4 Secs . 2 74 (d ), 2 8 0 F(d )(4 )(A)(i ); s ec. 1 .2 74 -5 T(a), Tem

p o rary In co m e Tax Reg s . , s up ra; s ee Bo y dv . Co m m i s s i o n er, 1 2 2 T.C. 3 0 5 , 3 2 0 (2 0 0 4 ). Th es e s tri cts ub st an t i at i o n ru l es g en eral ly req u i re the t ax p ay er t o s ub s t an t iat e wi t h ad equ at e reco rd s o r b y s u ffi ci en tev i d en ce
co rro b o rat in g th e t ax p ay er’ s o wns t at em en t(1 ) t h e am o u n to f t h e ex p en s e, (2 ) t h e t i m e an dp l ace t h e ex p en s e was i n cu rred , (3 ) t he b u s i n es s p urp o s e o f t h e ex p en s e,
an d (4 ) i n th e cas e o f an en t ert ai n m en t ex pen s e, t h e b u s i n es s rel at i o n sh i p b et ween t h e p ers o n en t ert ai n ed an dth e t ax p ay er. Bal y an v . Co m m i s s i on er, T.C. M em o .

1 4 A t ax p ay er m ay

d edu ctp as s en g er v eh i cl e ex p en s es b y u si n g ei th er act u al co s to r t he s tan d ardm i l eag e rat e, p ro v i dedh e s ub s tan t iat es th e am ou n to f b u s i n es s m i l eag e an dth e t i m e an d p u rp o s e o f each u s e. See s ec. 1
. 2 7 4 -5 (j)(2 ), In co m e Tax Reg s.; Rev . Pro c. 2 0 07 -7 0 , 2 0 0 7 -5 0 I.R.B. 1 1 6 2 ; An n o un cem en t2 0 0 8 -6 3 , 2 0 0 8
- 2 8 I.R.B. 1 1 4
.- 2 3 -

[* 2 3 ] 2 0 1 7 -1 4 0 , at* 7 ; s ec. 1 .2 7 4 -5 T(b ), Tem p o rary In co m e Tax Reg s ., 5 0 Fed
. Reg
. 4 6 0 1 4 (No v. 6 , 1 98 5 ). Fo r “ l i s t edp ro p erty ” ex p en s es , i n ad d it i on t o t h e t i m e
s u ch ex p en s es were i n cu rredan dth ei r b u si nes s p u rp o s e, t h e t ax p ay er m u s t
es t ab l i s h t h e am o u n to f b u si n es s u s e an dth e t o t al u s e o f s u ch p ro pert y . Bal y an v . Co m m i s s i o n er, at* 7 -* 8 ; s ec. 1 .2 7 4 -5 T(b )(6 )(i )(B), Tem p o raryIn co m e Tax Reg s ., 5 0 Fed . Reg . 4 6 01 6 (No v . 6 , 1 9 8 5 ). Sub s t an t i at i o n b y

ad equ at e reco rd s req u ires th e t ax p ay er t o m ai n t ai n (1 ) an
acco u n t bo o k , d i ary , l o g , s t at em en to f ex p en s e, t ri p s heet s , o r s i m i lar reco rd p rep aredco n t em

p o ran eo u s l y wi t h th e ex p en d i ture an d(2 ) d o cu m en t ary ev i d en ce,
s u ch as recei p ts o r p ai db i l l s , wh i ch t o g et h er p ro v e each el em en t o f an
ex p en d i tu re. Bal y an v . Co m m i s s i o n er, at* 8 ; s ec. 1 .2 7 4 -5 (c)(2 )(i i i ), In co m e Tax Reg s.; sec. 1 .2 7 4 -5 T(c)(2 ), Tem p o raryIn co m e Tax Reg s . , 5 0 Fed . Reg . 4 60 1 7 (No v. 6 , 1 9 8 5 ). Al t h o ug h t ax p ay ers m ay “ fi l l i n ” th e g ap s i n th ei r reco rd s wi t h
o ral t es t i m o n y , th at t es t i m o n y al o n e, reg ard l es s o f i ts s p eci fi ci ty , i s n o ts u ffi ci en t t o s at i s fy th e s ect i o n 2 74 (d ) s t ri cts ub s t an t i at io n ru l es ; t h ere m u st b e o t h er
co rro b o rat iv e ev i den ce. Sec. 1 .2 7 4 -5 T(c)(3 ), Tem p o raryIn co m e Tax Reg s., 5 0 Fed
. Reg . 4 6 0 2 0 (No v . 6 , 1 9 85 ). In ad d it i on t o t he s ect io n 2 74 (d ) s t ri ct
s ub s t an t i at i o n ru l es , m eal an den t ert ai n m en tex p en s es are s ub jectt o a fu rt h er- 2 4 -

[* 2 4 ] l i m i t at i o n : A t ax p ay er m ay d edu ct o n l y

5 0 % o f t h e ap p l icab l e ex p en s es cl ai m ed . Sec. 2 7 4(n )(1 ). Pet i t i o ners co n t en dth atth ey are en t i t l edt o d edu ctth e co s t o f t h e y ach t
ev en t as an ad v ert i s i ng ex pen s e b ecau s e i t en g en dered p o s it i ve feel i n g s am o n g p et i t i o n er’ s cl i en t s an d , b ecau s e h i s m ai n m et h o d o f at tract i n g n ew cl i en t s i s t h ro u g h wo rdo f m ou t h , th i s wo u l dh el p h i m o b t ai n n ew cl i en t s . Al t h o u g h i t ap p ears t o b e l es s l i k el y

thats u ch an ev en two u ldat t ractn ew cl i en t s , i td i db en efi t h i s cu rren tcl i en ts . Ei t h er way , i twas rel at edt o h i s cl i en t s an d b us i n es s an dth u s i s d edu ct i b l e as an o rd i n ary an dn eces s ary

b u s i n es s ex p en s e fo r m eal s an d
en t ert ai n m en t , s ub

jectt o th e ap p l i cab l e res t ri ct i o n s fo r s u ch ex p en s es . Pet i t i o n ers
s ub s t an t i at ed , t o res p o n den t ’ s s at i s fact i o n , th e am o u n t , t i m e, p l ace, an d b u s i n es s p u rp os e o f t h e ev en t p u rs uan tt o s ect i o n 2 7 4 (d ), an d t h atth e ex p en s e was atl eas t $ 3 ,0 2 0 . Res p o n d en tal l oweda d edu ct i o n o f $ 1 ,5 1 0 i n acco rdwi t h th e s t atu t e. Pet i t io n ers h av e n o ts h o wn t h atth ey are en t i t l edt o an am o u n t i n ex ces s o f
res p o n d en t’ s al lo w an ce. Pet i t io n ers co n t en dth atth e y ach tren t al ex ceed ed$ 8 ,0 0 0 b u th av e o nl y

p ro v id edp ro o f o f p aym en t o f l es s th an $ 4 ,0 0 0 , wh i ch was ad dres s ed i n res p o n d en t ’ s al l o wan ce. W e acco rd i n g l y h o ldth atres p o n d en t’ s d et erm i n at i o n wi t h res p ect t o th i s i t em i s n o ti n erro r.- 2 5 -

[* 2 5 ] Pet i t i o ners co n t en dth atth ey are en t i t l edt o d edu ct$ 4 ,4 2 1 i n car an dtru ck
ex p en s es an d an ad d i t i o nal $ 2,4 7 1 i n d ep reci at i o n rel at edt o u n s p eci fi ed
v eh icl e(s ). Pet i ti o n ers , h o wev er, d i d n o tp ro vi d e s u ffi ci en ts ubs t an ti at i o n t o
s up p ortth ei r car an dtru ckex p en s es . W e n ot e t h atthey fai l edt o i den t i fy

th e
v eh icl e(s ) fo r wh ich th ey cl ai m t o h av e i n cu rredth es e ex pen ses , an das a res u l t i t i s n o tev en cl ear t o u s t h atp et i t i o n ers d idn o tal read y d edu cttho s e ex p en s es as M rs . Du n can ’ s u n rei m

b u rs edem

p l o y ee ex p en s es o n t h ei r Sch edu l e A. Co n s equ en t l y , we s us t ai n res p o n d en t ’ s d i s al l o wan ce o f t h es e d educt i o n s i n fu l l
. Sect io n 1 6 6 (a)(1 ) al lo w s a t ax p ay er t o d edu ct an y d eb tthatb eco m es wh o l l y
wo rt h l es s wi t h i n th e t ax ab l e y ear. Sect i o n 1 6 6(a)(1 ) d o es n o t , h o wev er, ap p l y t o a
n o nb u s i n es s d eb t h el db y a t ax pay er o t h er t h an a co rp o rat i o n ; i n s t ead , th e t ax p ay er i s al l o weda s h o rt -t erm

cap i t al l o s s fo r t h e t ax ab l e y ear i n wh i ch th e d eb t b eco m es
wo rt h l es s . Secs
. 1 6 6 (d )(1 ), 1 2 1 1 (b ); s ec. 1 .1 6 6 -5 (a)(2 ), In co m e Tax Reg s . On l y a b o n a fi d e d eb t qu al i fi es fo r p u rp o s es o f s ect i o n 1 6 6 ; b o n a fi d e d eb ti s a d eb tth at ari s es fro m

“ a d eb t o r-cred i t o r rel at i o n s h i p b as edup o n a v al idan den fo rceab l e
o b l i g at i o n t o p ay

a fi x edo r d et erm i n ab l e s u m o f m o n ey .” Kean v . Co m m i s s i o n er, 9 1 T.C. 5 7 5 , 5 9 4 (1 9 8 8 ); Di x i e Dai ri es Co rp . v . Co m m i s s i o n er, 7 4 T.C. 4 7 6 , 4 93 (1 9 8 0); s ec. 1 .1 6 6-1 (c), In co m e Tax Reg s. A g i fti s n o t co n s i d ereda “ d eb t ” fo r p u rp os es o f s ect io n 1 6 6 . Sec. 1 .1 6 6 -1 (c), In co m e Tax Reg s . Acco rd i n gl y , th e- 2 6 -

[* 2 6 ] t ax p ay er m

u s tes t ab l i s h b o t h th e ex i s t en ce o f a b o n a fi d e d eb t , Cl ark v . Co m m i s s i o n er, 1 8 T.C. 7 80 , 7 8 3 (1 9 5 2 ), aff’ d p er cu ri am , 2 0 5 F.2 d3 5 3 (2 dCi r. 1 9 5 3 ), an d t hatth e d eb t b ecam e wo rt h les s du ri n g the t ax ab l e y ear fo r wh i ch a
s h o rt -t erm

cap i t al l o ss i s cl ai m ed , Du s t i n v . Co m m i s si on er, 5 3 T.C. 4 9 1 , 5 0 1 -5 0 2 (1 9 6 9), aff’ d , 4 6 7 F.2 d4 7 (9 t h Ci r. 1 9 7 2 ). Pet i t i o ners cl ai m

th atth ey are en t i t l edt o d edu ct$ 6 9 0 fo r a b add eb tl o s s o n a l oan t o a d i s t an trel at i v e wh o fai l edt o m ak e m o re t h an o ne p aym en to n t he d eb t
as ag reed . Ho wev er, p et i t i on ers h av e n o tes t ab li sh edth e ex i st en ce o f a b o n a fi d e d eb t i n an y

way o t h er t h an th ro u g h p et i t io n er’ s “ s el f-s erv i n g ” t es t i m o ny , s ee Sh ea
v . Co m m i s s i o n er, 1 1 2 T.C. 1 83 , 1 8 9 (1 9 9 9) (ci t i n g To k ars k i v . Co m m i s s i o n er, 8 7 T.C. 7 4 , 7 7 (1 98 6 )), 1 5 n o r h av e t h ey es tab l i s h edthatth e d eb t b ecam e wo rt h l es s du ri n g 2 0 0 8 . Acco rd i n g l y , we s u s t ai n res p o n d en t ’ s d i s al l o wan ce o f t h i s d edu ct i o n i n fu l l an d fu rt her fi n dthatp et i t i o n ers are n o tal l o wed a s h ort -t erm cap i t al l o s s d educt i o n fo r t h e cl ai m ed b ad d eb tl o s s . W e h av e co n s id eredal l o f t h e arg um en t s m ad e b y t h e p art i es an d , t o th e
ex t en tth ey

are n o tad dres s edh erei n , we fi n dth em t o b e m o o t , i rrel ev an t, o r wi t h o u tm eri t
.

1 5 W e al s o n o t e t hato n t h e b as i s o f t h e fact s an dci rcu m s t an ces , th e p u rp ort edd eb t i s a n o nb u si n es s d eb twi th in th e m ean i n g o f s ec. 1 6 6 (d )(2 ).- 2 7 -

[* 2 7 ] To refl ectthe fo reg o i n g an d res p on d en t ’ s co nces s i o n s , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.