T.C. Mem o. 2 01 3- 15 3

UNITED STAT ES TAX COURT

CEDAR VALLEY BIRD C O., LL P, SIX-D LLP, TAX MATTE RS PARTNER, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt CEDAR VALLEY BIRD C O., SIX-D LLP, TAX MATTERS PARTNER, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 2 67 88 -0 6, 2 93 79 -0 7. File d J un e 1 9, 2 01 3.

All enR. Davi so n II , pro se. Dou gl as S. Pol sky , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION
PARIS , Ju dg e: Thes e co ns ol id at edcas es are p artne rs hi p- le ve l p ro ceed in gs subjec t t o the un ifi edau di t an d l it ig at io n p ro cedur es of t he Tax Equi ty andFis cal- 2 -

[* 2] Res po ns ib il ity

Act o f 19 82 , Pub . L. No. 97 -2 48 , sec . 40 2( a), 9 6 S ta t. at64 8. Intwo sep arat e n ot ic es of f in al partn ers hi p a dm in is tra ti ve ad jus tm en t (F PAA)
res po nd en t ad

jus te d the partn ers hi p i te m s o f Ced ar Val le y Bir d C o., LLP (Ce da r Vall ey ), fo r ta x years 2 00 2, 2 00 3, an d 2 00 4, b y , in te r al ia : (1 ) ad jus ti ng gro ss rece ip ts ; (2 ) di sa ll owi ng de du ct io ns forco ns ul ti ng fees , con tra ctex pe ns es , and
co stof g oo ds so ld ; an d (3 ) rec ha ract eri zi ng Ced ar Val le y ’s in co m e acc or di ng ly. 1 The se ad jus tm en ts st em

lar ge ly from

Ced ar Val le y ’s fai lure t o p ro pe rly
subs tant ia te th e in co m e an d e xp en se s re po rte d o n i ts partn ers hi p re tu rn s fo r th e y ears at i ss ue as r equi redby sect io n 6 00 1. Thu s, af te r co nc es si on s, th e p rimary 2 3 is su e fo r de ci si on is whet he r Ced ar Val le y pro pe rly repo rte d i ts in co m e an d
ex pe ns es for20 02 , 20 03 , and20 04
. 4

Res po nd en t’s ad

jus tm en ts in cl ud edco m

pu ta ti on al ad

jus tm en ts th atare n ot 1 di rect ly in d is pu te . Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o the Int ern al 2 Rev enue Co de of 1 98 6 (C od e) i n e ffec t fo r th e y ears at i ss ue , andall Ru le refe ren ces are t o the Tax C ou rt Rul es of P ract ic e an d P ro cedur e. Pet it io ne r co nc ed es res po nd en t’s d is al lo wan ce o f a d educ ti on of $ 18 ,26 0 3 fo r co ns ul ti ng ex pe ns es rep orte d i n 2 00 2. On b rie f pe ti ti on er al so arg ue d tha t Ce dar Val le y is a se pa rat e ta x e nt ity 4 with b us in es s p ur

po se an d e co no m ic subs tanc e th atpro pe rly elec te d the accr ua l m etho d o f acc ou nt in g. Re sp on de nt , ho wev er, h as no t ch al le ng edCed ar Val le y ’s ta x s ta tu s o r it s m etho d o f acc ount in g, an d the y are the refo re n otat i ss ue .- 3 -

[* 3] FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at ed , andth e st ip ul at io n o f fac ts an d the
ex hi bi ts att ach edth eret o are i nc or po rat edhe rei n b y

th is refe ren ce. Ced ar Val le y is
anIowali m it edli ab il ity

partn ers hi p, an d a t the ti m e th e p et it io n was fil ed , Ced ar Vall ey ’s pri nc ip al pl ace o f bu si ne ss was i n Io wa. Six -D, LLP (Six -D), a Kan sa s pa rtn ers hi p, i s C ed ar Val le y ’s tax m at te rs partn er an d the pe ti ti on er i n the se cas es . All enR. Davi so n II , a cert ifi edpubl ic acco un tantan d t ax att orne y , creat ed Ced ar Val le y

in20 02 an d was a pa rtn er i n C ed ar Val le y with S ix -D. Acco rd in g t o Ced ar Val le y ’s Form

10 65 , U.S. Retu rnof P artne rs hi p In co m e, Ced ar Val le y st art edbu si ne ss onApri l 1 , 20 02 . Davi so n fi le d C ed ar Val le y ’s org an iz at io na l do cu m en t, a s ta te m en t o f qu al ifi cat io n fo r a l im it edli ab il ity partn ers hi p, wi th th e Io wa se cret ary of

st at e o n M ay

17 , 20 02
. Si x- D is a ge ne ral partn ers hi p o rg an iz edinKans as , bu t n o fi li ng was m ad e with the Kans as sec ret ary of st at e o r with any oth er s ecre tary of s ta te of a ny oth er St at e in th e Uni te d S ta te s t o e le ctli mit edli ab il ity . Duri ng th e y ears at i ss ue Six -D ha d the fol lo win g p artne rs : (1 ) Dav is on an d h is wife , as c ot ru st ees of t he Sh aro n L. Davi so n Li vi ng Trus t, o wne d a95 % in te res t i n S ix -D; (2 ) Dav is on inhi s in di vi du al cap aci ty owne d a1% i nt eres t i n S ix -D; and(3) Davi so n andhi s wi fe’s fo urch il dr eneach own eda 1% i nt eres t i n S ix -D. Eventh ou gh Davi so n’s ch il dr en- 4 -

[* 4] ha d o wne rs hi p i nt eres ts inSix -D, Davi so n andhi s wi fe re po rte d 1 00 % of S ix
D’ s fl owthr ou gh am ou nt s o n the ir p ers on al return. 5 Dur in g the y ears at i ss ue Davi so n, i n h is in di vi du al cap aci ty, al so ha d an own ers hi p i nt eres t i n F rem on t Fa rm s o f Io wa (Fre m on t Fa rm s) an d C ed ar Val le y Egg Farm (CV Egg Farm ), whi chare eg g p ro du ct io n c om pa ni es . Davi so n was a 10 % own er an d m an ag er o f CV Egg Farm an d a2.5 % own er o f Frem on t Fa rm s. Whe n the eg g p ro du ct io n c om pa ni es ne ed edm on ey

to fin an ce the ir o pe rat io ns , Dav is on crea te d afin an ci ng arrang em en t b etweenhi s cl ie nt s an d the co m pa ni es . Purs ua ntto th is arrang em en t, Dav is on ’s cli en ts wou ldlen d m on ey to th e eg g pr oduc ti on co m

pa ni es inex ch an ge forrep aym en t o f th ei r lo an s p lu s a g uaran te ed rat e o f return. 6
Dav is on , inhi s capa ci ty as anatt orne y for pe ti ti on er, fi le d p et it io ns with 5 th e Co urt an d o rig in al ly repre se nt edpe ti ti on er as it s l eg al co un se l. Ho wev er, i n or de r to av oi d c ert ai n c on fli ct s o f in te res t, Dav is onfil eda m ot io n t o wi th dr aw as at to rn ey of r eco rdonJu ne 11 , 20 12 , andfil eda supp le m en t t o h is m ot io n o n J un e 13 , 20 12 . Befo re tria l the Co urt g ran te d Dav is on ’s m ot io n t o wi th dr aw as att orne y of reco rd , as s up pl em en te d. Attri al Davi so n re pr es en te d p et it io ne r in hi s capa ci ty as th e co tru st ee o f hi s wi fe’s tru st , th e ta x m at te rs partn er o f Si x- D, andinhi s cap aci ty as a 1 % own er o f Si x- D. Dav is on advi se d h is cli en ts to cla im th atth ey were farm ers pu rch as in g 6 lay er h en s an d, as su ch , th ey co ul d d educ t the ful l am ou ntof t he ir l oa ns pl us farm in g- rel at edde du ct io ns . Davi so n re li edonRev . Rul . 60 -1 91 , 19 60 -1 C.B. 7 8, whi chpro vi de s “ th atfarm ers em pl oyin g the cas h m etho d o f acc ou nt in g m ay de du ctth e co stof b ab y

ch ic ks an d e gg -la y in g h en s i n the y ear o f paym en t (co nt in ue d...)- 5 -

[* 5] Dav is on , inhi s l eg al cap aci ty as anatt orne y forhi s cl ie nt s, s ee Un it ed St at es v. Dav is on , No. 0 8- 01 20 -CV-W-GAF (W .D. Mo. Ap r. 7, 2 01 1) (or de r gr an ti ng pre li m in ary in

jun ct io n) , dra fte d the co nt ract s (f lo ck co nt ract s) be twee n hi s cl ie nt s an d the eg g p ro du ct io n c om pa ni es , andCed ar Val le y serve d a s a t hi rd
pa rty bro ke r. Ced ar Val le y was n ota pa rty to t he flo ckco ntract s o r to an y bro ke r orlo angu aran ty agree m en t wi th Davi so n’s cl ie nt s o r th e eg g p ro du ct io n co m pa ni es . In s om e cas es , ho wev er, Ced ar Val le y en te redin to anass ig nm en t an d pu rch as e ag reem en t wi th Davi so n’s cl ie nt s p ur ch as in g the ir r ig ht s i n the flo ck
co nt ract s. At tria l Dav is on tes ti fie d tha t Ce da r Val le y di d n otcla im

an y own ers hi p in te res t i n the layer he ns or i n any relat edflo wth ro ug h i nc om e an d e xp en se s. Ced ar Val le y

rece iv eda 3% c omm is si on forarrang in g the flo cklo an tra ns act io ns . Whi le so m e o f Dav is on ’s cli en ts len t m on ey di rect ly to the eg g 7 pr oduc ti on co m

pa ni es , th e eg g p ro du ct io n c om pa ni es rep ai d the lo an s, p lu s (...co nt inue d) 6 th eref or , pro vi de d s uc h m etho d i s co ns is te nt ly foll owe d andcle arl y refl ect s in co m e.” The rev enue rul in g, h owe ve r, ap pl ie s o nl y to farm ers withi n the m ean in g o f th e Co de , andDavi so n’s cl ie nt s, wh o wer e n ev er i nv ol ve d i n fa rm in g, di d n otm eetth is de fin it io n. Se e Uni te d S ta te s v . Davi so n, No . 08 -0 12 0- CV-WGAF (W .D. Mo. Ap r. 7, 2 01 1) (or de r gr an ti ng pre li m in ary in jun ct io n)
. At tria l Dav is on cla im edth atCed ar Val le y tra ns ferr edth e co m

m is si on to 7 Si x- D Ent erp ris es , Inc . (Six -D In c.), o ne of Da vi so n’s en ti ti es . Six -D In c., ho wev er, d idno t h av e a b an k a cco un t, an d Dav is on co ul d n otothe rwis e subs tant ia te hi s cl ai m .- 6 -

[* 6] in te res t o f ab ou t 6 %, th ro ug h C ed ar Val le y . The eg g p ro du ct io n c om pa ni es rep ai d s om e o f th e lo an s b efo re the he ns ’ cy cl e o f eg g p ro du ct io n e nd edor b efo re th e h en s b ecame “ sp en t”
. 8 On i ts partn ers hi p re tu rn s fo r th e y ears at i ss ue , Ced ar Val le y rep orte d in co m e an d e xp en se s re la te d t o i ts lo anbro ke rin g a ct iv it ie s u si ng anaccrua l
m etho d o f acc ou nt in g. Ce da r Val le y rep orte d the fol lo win g am ou nt s fo r 20 02 , 20 03 , and20 04 :
Year Gro ss rece ip ts Co stof g oo ds so ld Deduc ti on s Ord in ary in co m e o r (lo ss ) 20 02 $2 ,20 6,3 64 $2 ,19 9,8 68 $1 8,2 60 ($ 11 ,76 4) 20 03 2,7 61 ,57 5 2,2 23 ,54 0 82 1,1 40 (2 83 ,10 5) 20 04 2,3 61 ,11 7 1,4 40 ,00 0 1,3 64 ,43 3 (4 43 ,31 6) Ced ar Val le y ’s deduc ti on s i nc lu de d, i nt er al ia : (1 ) fo r 20 02 , $1 8,2 60 of c on su lt in g fees ; (2 ) fo r 20 03 , $8 20 ,74 0 o f co ns ul ti ng fees ; an d (3 ) fo r 20 04 , $9 2,9 90 of
co ns ul ti ng fees , $1 ,26 9,7 15 of c on tra ctex pe ns es , and$1 ,72 8 o f m is cel lane ou s

“ Sp en t” is anin du st ry

term th atm ean s the en d o f a h en ’s egg pro du ct io n 8 cy cl e. A hen ’s egg pro du ct io n c y cl e is si gn ifi can t fo r acc ou nt in g m etho d pu rp os es . Farm ers who sel l eg gs co m m erci al ly gen eral ly keep th ei r la y in g h en s on ly one y ear a fte r th ey

st artpro du ci ng eg gs . Thu s, the se he ns are h el d fo r sa le in ad di ti on to be in g h el d fo r th e p ro du ct io n o f eg gs . Rev . Rul . 60 -1 91 , supr a, pr ov id es th atfarm ers who us e th e cas h m etho d o f acc ou nt in g m ay de du ctth e co st of he ns an d b ab y

ch ic ks purch as edforeg g- lay in g o r fo r rai si ng an d s al e in th e y ear o f pa ym en t.- 7 -

[* 7] ex pe ns es . The co ns ul ti ng fees , whi chDavi so n l at er cl ai m edwere co nt ract
ex pe ns es , were p ur

po rte dl y pa idto Davi so n i n h is leg al cap aci ty as anatt orne y for hi s cl ie nt s. Dur in g re sp on de nt ’s aud itex am in at io n fo r Ced ar Val le y ’s 20 02 , 20 03 , and 20 04 tax y ears , Davi so n p ro vi de d re sp on de nt ’s rev enue ag en t wi tha on e-p ag e ha nd writ te n s umm ary fo r eac h year atis su e to supp ort Ce da r Val le y ’s rep orte d in co m e an d e xp en se s. Dav is onpre paredth e o ne -p ag e su m m ari es an d l is te d t ot al
am ount s fo r it em s s uc h a s C ed ar Val le y ’s in co m e, gr os s re cei pt s, d iv id en d and in te res t i nc om e, fl oc k c on tra ct s, co stof s al es , andfees , witho utan y ad di ti on al de ta il s. Dav is on di d n otpro vi de th e rev enue ag en t wi th an y ad di ti on al bo ok s an d
reco rd s dur in g aud it . Con se qu en tl y , th e rev enue ag en t i ss ue d v ari ou s thi rd -p arty su m m on se s an d d et erm in edth atCed ar Val le y m ai nt ai ne d awork in g c ap it al
m an ag em en t ac co un t atMerr il l Lync h. Th ro ug h the su m m on s p ro ces s, the
rev enue ag en t o bt ai ne d C ed ar Val le y ’s ban k a cco un t s tate m en ts . The rev enue ag en t co nduc te d abankde po si ts an al y si s b y whi chhe ex am in edall of t he tra ns act io ns , dep os it s, an d d is bu rs em en ts oc curri ng inth e acc ou nt s fo r th e y ears at is su e. He id en ti fie d C ed ar Val le y ’s in te res t i nc om e, lo anfees , ban k c ha rg es , and di vi de nd s. He al so id en ti fie d C ed ar Val le y ’s che ck s t o C V Egg Farm , Freem on t- 8 -

[* 8] Farm s, an d Io wa Qua li ty Pull et s an d m ark edth em as “ pu rch as es ”. The
rev enue ag en t co ul d n ot , ho wev er, i de nt ify every tra ns act io n l is te d i n C ed ar Vall ey ’s acco un t s tate m en ts an d m ark edth e uni de nt ifi edtrans act io ns as

“ Oth er/un kn own ”. Inad di ti on to Ced ar Val le y ’s ban k a cco un t s ta te m en ts , th e rev enue ag en t ob ta in ed : (1 ) ta x re po rti ng st at em en ts is su edto Ced ar Val le y forth e y ears at i ss ue rep orti ng tax ab le di vi de ndan d i nt eres t i nc om e; (2) Fo rm s 1 09 9- MIS C, Mi sc el lane ou s In co m e, is su edto Ced ar Val le y fro m CV Egg Farm

for20 02 an d 20 03 ; an d (3 ) co pi es of f

lo ckco nt ract s fr om

so m e o f Dav is on ’s cli en ts . 9 On Oct ob er 4 , 20 06 , res po nd en t i ss ue d t o p et it io ne r anFPAA fo r ta x year 20 02 , andonSep te m

be r 20 , 20 07 , res po nd en t i ss ue d t o p et it io ne r anFPAA fo r ta x y ears 20 03 an d 2 00 4. Re sp on de ntin cl ud eda Fo rm 87 0- PT, Agre em en t fo r Part ne rs hi p It em s an d P artne rs hi p Lev el Dete rm in at io ns as t o P en al ti es , Add it io ns to Tax, an d Ad di ti on al Am ou nt s, wi th each FPAA. The Fo rm s 8 70 -PT m ad e th e fo ll owi ng ad

jus tm en ts to Ced ar Val le y ’s 20 02 , 20 03 , and20 04 returns :

At tria l the rev enue ag en t t es ti fie d tha t h e co nt act edDavi so n’s cl ie nt s t o 9 ob ta inco pi es of t he ir f

lo ckco nt ract s. He co ul d n otob ta inth e o th er fl oc k co nt ract s fr om

th e b oo kk eep er o f CV Egg Farm be cau se Davi so n was th e m an ag er of CV Egg Farm

an d k ep t al l o f th e co pi es of the flo ckco nt ract s. Dav is on di d n ot pr ov id e co pi es of the flo ckco nt ract s dur in g d is co ve ry or a t tria l.- 9 -

[* 9] Year Adju st m en ts to gr os s re cei pt s Adju st m en ts to

co stof g oo ds so ld Adju st m en ts

to ex pe ns es Tot al ad

jus tm en ts to ord in ary in co m e 20 02 -0
- -0
- $1 7,9 05 $1 7,9 05 20 03 ($2 ,72 1,5 75 ) $2 ,22 3,5 40 82 0,7 40 32 2,7 05 20 04 (2,3 38 ,11 7) 1,4 40 ,00 0 1,3 63 ,97 3 46 5,8 56 The ad jus te d e xp en se s i nc lu de d: (1) for20 02 , $1 8,2 60 of c on su lt in g fe es , les s a de du ct io n fo r $3 55 of b an k c ha rg es ; (2 ) fo r 20 03 , $8 20 ,74 0 o f co ns ul ti ng fees ; an d (3 ) fo r 20 04 , $9 2,9 90 of c on su lt in g fe es , $1 ,26 9,7 15 of c on tra ctex pe ns es , and $1 ,26 8 o f ba nkch arg es . The Fo rm s 8 70 -PT al so ad jus te d C ed ar Val le y ’s po rtf ol io in co m e to in cl ud e ad di ti on al tax ab le in te res t o f $1 6,8 33 , $6 2,5 00 , and$5 0,0 00 , fo r 20 02 , 20 03 , and20 04 , res pe ct iv el y . Add it io na ll y , onth e Fo rm s 8 70 -PT,
res po nd en t d et erm in edth atCed ar Val le y ’s correct edin co m e co ns ti tu te d n et
earn in gs fro m

sel f-em pl oym en t t o p et it io ne r th atwou ldflo w th ro ug h t o pe ti ti on er’s i nd iv idua l p artne rs acco rd in g t o the ir d is tri bu ti ve sh ares . Res po nd en t ad

jus te d C ed ar Val le y ’s gro ss rece ip ts us in g the rev enue ag en t’s b an k d ep os it s an al y si s o f Ced ar Val le y ’s ban k a cco un ts . For 2 00 3 and 20 04 res po nd en t ad

jus te d C ed ar Val le y ’s gro ss rece ip ts to in cl ud e co m m is si on in co m e o f $4 0,0 00 an d $ 23 ,00 0, re sp ect iv el y , andde te rm in edth atCed ar Val le y di d n otha ve co stof g oo ds so ld . Res po nd en t d idno t ad jus t Ce da r Val le y ’s gro ss- 10 -

[* 10 ] rece ip ts an d c os t o f go od s s ol d fo r 20 02
. W ith re sp ectto Ced ar Val le y ’s 1 0
ex pe ns es , res po nd en t d is al lo wedall un subs tant ia te d e xp en se s an d d et erm in edth at Ced ar Val le y

di d n otin cur th e co ns ul ti ng an d c on tra ctexpe ns es cla im edfor th e y ears at i ss ue . Peti ti on er t im el y fil edpe ti ti on s wi th th e Co urt s eek in g read jus tm en t o f Ced ar Val le y ’s partn ers hi p i te m s. 1 1
Res po nd en t h as no t ex pl ai ne d wh y he di d n otad

jus t Ce da r Val le y ’s gro ss 1 0 rece ip ts an d c os t o f go od s s ol d fo r 20 02 . At tri al th e rev enue ag en t t es ti fie d tha t he di d n otfin d e vi de nc e o f an y sal es in co m e fo r th e y ears at i ss ue . He exp la in ed th atCed ar Val le y ’s ban k d ep os it s co ns is te d o f m on ey len t b y Davi so n’s cl ie nt s t o CV Egg Farm

an d F reem on t Fa rm s. Th e rev enue ag en t al so tes ti fie d tha t the on ly ev id en ce o f Ced ar Val le y ’s cos t o f go od s i s i ts ch eck s i ss ue d t o Io wa Qua li ty Pu ll et s fo r fl oc k p ur ch as es in20 02 . Eventh ou ghCed ar Val le y is su edth e ch eck s, itwas n otcle ar tha t Ce da r Val le y was the actua l p ur ch as er. Non ethe le ss , itsee m s th atth e rev enue ag en t at tri bu te d C ed ar Val le y ’s flo ckpu rch as es an d any relat ed gr os s re cei pt s t o C ed ar Val le y ’s cos t o f go od s s ol d andgro ss rece ip ts for20 02 , whi chres po nd en t l eftun ad jus te d. Afte r pe ti ti on er b eg anit s C ou rt p ro ceed in gs , in20 08 th e U.S. Depa rtment 1 1 of Ju st ic e fi le d aciv il in

jun ct io n a ct io n a ga in stDavi so n i n the U.S. Dist ric t Co urt fo r th e Weste rnDis tri ctof M is so ur i. The civ il in jun ct io n a ct io n s ou gh t t o e njo in Dav is on fro m

gi vi ng Fed eral tax advi ce an d s el li ng frau du le nttax sh el te rs , in cl ud in g s ha m

flo ckco nt ractarrang em en ts in vo lv in g C ed ar Val le y . On May 11 , 20 10 , th e Dis tri ctCo urt fi le d an i nju nc ti onag ai ns t Dav is on , andonJan ua ry 31 , 20 11 , th e Co urt o f App eal s fo r th e Eig ht h C irc ui t af firm edth e in

jun ct io n, wi th on e ex cep ti on no t re le va ntto th es e cas es . Uni te d S ta te s v . Davi so n, 4 07 Fed . App x. 99 7 (8 thCir . 20 11 ). The Di st ric t Co urt i ss ue d an u np ub li sh edam en de d i nju nc ti on on Apri l 7 , 20 11 . In re ach in g i ts de ci si on , th e Dis tri ctCo urt fo un d, i nt er al ia , th at th e fl oc k c on tra ct s C ed ar Val le y us edwere s ha m

co nt ract s an d, i ns te ad , Ced ar Vall ey op erat edas ath ird -p arty bro ke r fo r th e lo antra ns act io ns be twee n Dav is on ’s cli en ts an d the eg g p ro du ct io n c om pani es . Uni te d S tate s v . Davi so n, No. 0 8- 01 20 -CV-W-GAF (W .D. Mo. Ap r. 7, 2 01 1) (or de r gr an ti ng pre li m in ary (co nt in ue d...)- 11 -

[* 11 ] OPINION I. Burd enof P ro of Gen eral ly, th e Co m

m is si on er’s ad

jus tm en ts inanFPAA are p res um ed
co rrec t, an d the tax pa y er b ears th e b ur de n o f pr ov in g tha t the ad jus tm en ts are in co rrec t. See Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ); s ee al so Rep ub li c Pl aza P ro ps . P’shi p v . Comm is si on er, 1 07 T.C. 94 , 10 4 (1 99 6) (“ Pet it io ne r be ars th e b ur de n o f pr ov in g re sp on de nt ’s det erm in at io ns inth e FPAA
are e rro ne ou s.”) ; Cl ov is I v. Co m m is si on er, 8 8 T.C. 9 80 , 98 2 (1 98 7) (anFPAA is th e fu nc ti on al equi va le ntof ano ti ce o f de fic ie nc y .). Inun rep orte d i nc om e cas es , ho wev er, the pre su m pt io n o f co rrec tn es s tha t at ta ch es to th e Co m

m is si on er’s d et erm in at io ns requi res th e Co m m is si on er t o es tabl is h s om e ev id en ti ary fo un da ti onco nn ect in g the tax pa y er wi th th e in co m epr oduc in g a ct iv ity , see Day v. Co m m is si on er, 9 75 F.2d53 4, 5 37 (8t h C ir. 1 99 2) , aff’g i n p art , rev ’g inpart T.C. M em o. 1 99 1- 14 0, o r de m on strat in g tha t the ta xp ay er ac tu al ly recei ve d u nr ep orte d i nc om e, se e Edward s v . Comm is si on er, 6 80 F.2 d 1 26 8, 1 27 0- 12 71 (9th C ir. 1 98 2) . W ith re sp ectto Ced ar Val le y ’s un rep orte d in co m e ad

jus tm en ts forth e y ears at i ss ue , th e p art ie s ag ree tha t Ce da r Val le y (...co nt in ue d) 1 1 in jun ct io n)
.- 12 -

[* 12 ] rece iv edin co m e fro m it s i nv ol ve m en t i n the flo ckco nt ract s. Th ei r di sa gr eem en t, h owe ve r, pe rta in s t o C ed ar Val le y ’s rol e in th e fl oc k l oa n tra ns act io ns an d wh ethe r Ced ar Val le y ’s rol e as a th ird -p arty lo anin te rm ed iary ge ne rat edad di ti on al in co m e an d e xp en se s tha t wer e n otreco rd edinCed ar Vall ey ’s ban k re co rd s. Thu s, re sp on de ntha s d em on strat eda li nkbe twee n C ed ar 1 2 Vall ey an d the tax -p ro du ci ng in co m e, an d re sp on de ntis en ti tl edto th e u su al pr es um pt io n o f co rrec tn es s. Und er s ect io n 7 49 1( a), the bu rd enof p ro of m ay sh iftto th e Co m

m is si on er i f th e ta xp ay er p ro du ces cred ib le ev id en ce wi thres pe ctto an y rel ev an t fa ctua l i ss ue an d s at is fie s the requi rem en ts of s ect io n 7 49 1( a)(2 ). Sect io n 7 49 1( a)(2 ) requi res a ta xp ay er t o d em on st rat e th athe (1) co m pl ie d wi th requi rem en ts un de r th e Co de to
subs tant ia te an y

it em , (2) m ai nt ai ne d a ll reco rd s re qu ire d u nd er the Co de , and(3)
co op erat edwith re as on ab le reque st s b y th e Sec ret ary 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. See als o Hi gb ee v . Comm is si on er, 1 16 T.C. 43 8, 4 40 -4 41 (20 01 ). The b ur de n i s o n the tax pa y er t o s ho w th athe sat is fie d the se requi rem en ts . See Ri ch ard so n v . Commis si on er, T.C. Mem o. 2 00 5- 14 3. At tria l Dav is on m ad e anora l m ot io n t o s hi ft t he bu rd enof p ro of to
res po nd en t. The is su e in th es e cas es is pri m ari ly whe th er Ce da r Val le y pro pe rly See i nf ra p p. 1 5- 16
. 1 2- 13 -

[* 13 ] rep orte d i ts in co m e an d e xp en se s fr om it s l oa n i nt erm ed iary

act iv it ie s. Pet it io ne r, ho wev er, fai le d t o p ro du ce an y cred ib le ev id en ce tha t Ce da r Val le y pr op erl y rep orte d i ts in co m e an d e xp en se s. Infact , pet it io ne r di d n otm ai nt ai n bo ok s an d re co rd s tha t s up po rt C ed ar Val le y ’s rep orte d i nc om e an d e xp en se s, an d, whe n a sk edto pro vi de supp orti ng do cum en ts , pet it io ne r di d n otco op erat e. The refo re, p et it io ne r di d n otco m pl y with the subs tant ia ti onrequi rem en ts of
se ct io n 7 49 1( a)(2 )(A), an d i t d idno t m ai nt ai n a ll requi redreco rd s o r co op erat e with re sp on de nt ’s reas on ab le reque st s as requi redby sect io n 7 49 1( a)(2 )(B)
. The Co urt the refo re d et erm in edth atpe ti ti on er d idno t s at is fy th e requi rem en ts of s ect io n 7 49 1 and , onJune 13 , 20 12 , ent ereda writ te n o rd er de nyin g p et it io ne r’s or al m ot io n t o s hi ft t he bu rd enof p ro of . In i ts bri efs , pe ti ti on er ag ai n c la im s tha t the bu rd enof p ro of ha s s hi fte d t o re sp on de nt . This cl ai m is li ke wis e d en ie d fo r th e rea so ns de sc rib edab ov e, an d the burd enof p ro of
rem ai ns onpe ti ti on er. II. Adju st m en ts of P artne rs hi p It em s A. Gros s R ecei pt s an d In co m e Adju st m en ts Res po nd en t ad

jus te d C ed ar Val le y ’s gro ss rece ip ts for20 03 an d 2 00 4 t o in cl ud e co m

m is si on in co m e o f $4 0,0 00 an d $ 23 ,00 0, re sp ect iv el y . Res po nd en t- 14 -

[* 14 ] al so de te rm in edth atCed ar Val le y ha d a dd it io na l i nt eres t i nc om e fo r eac h o f th e y ears at i ss ue . Und er s ect io n 6 00 1, t ax pa y ers m us t m ai nt ai n s uf

fic ie ntbo ok s an d re co rd s es tabl is hi ng th e co rrec t co m pu ta ti on of t he ir t ax ab le in co m e. If a t ax pay er fa il s t o
m ai nt ai n a de qu at e b oo ks an d re co rd s, the Co m m is si on er m ay

de te rm in e th e ta xp ay er’s i nc om e b y

an y m etho d tha t cl earl y

refl ect s i nc om e. Sec. 4 46 (b ); s ee al so Pet zo ld t v . Comm is si on er, 9 2 T.C. 6 61 , 69 3 (1 98 9) . The Co m m is si on er’s
reco ns tru ct io n o f a t ax pa y er’s i nc om e “ ne edon ly be rea so nabl e in li gh t o f al l
su rro un di ng fact s an d c irc um st an ces .” Pet zo ld t v . Comm is si on er, 9 2 T.C. at68 7. The on ly recor ds do cu m en ti ng Ced ar Val le y ’s rep orte d i nc om e were aon epa ge hand writ te n d oc um en t p rep aredby D av is on foreach y ear a t i ss ue , ban k
acco un t s ta te m en ts , in te res t an d d iv id en d t ax rep orti ng st at em en ts , andFo rm s 10 99 -MI SC. Res po nd en t co ul d n otti e Ced ar Val le y ’s rep orte d i nc om e to it s b an k
acco un t s ta te m en ts . In a dd it io n, the on e-p ag e su m m ari es , whi chDavi so n u se d t o 1 3 pr ep are C ed ar Val le y ’s returns , di d n otco rres po ndto th e in co m e ref le ct edin Ced ar Val le y ’s th ird -p arty reco rd s o r pr ov id e an y

de ta il s re gard in g the so ur ces an d
At tria l the rev enue ag en t t es ti fie d tha t i n h is rev ie w of the de po si ts an d 1 3 ch eck s i ss ue d fr om

Ced ar Val le y ’s Merr il l Lync h a cco un t h e “ co ul d n otreco nc il e an yth in g t o the gro ss rece ip ts an d c os t o f go od s s ol d a m ount s re po rte d o n the returns .”- 15 -

[* 15 ] am ou nt s o f Ced ar Val le y ’s in co m e. Acco rd in gl y , Ced ar Val le y di d n ot
m ai nt ai n s uf

fic ie ntbo ok s an d re co rd s, an d re sp on de ntwas e nt it le d t o re co ns tru ct Ced ar Val le y ’s tax ab le in co m e u si ng a reas on ab le m etho d. Res po nd en t re co ns tru ct edCed ar Val le y ’s tax ab le in co m e u si ng , in te r al ia , ba nkacco un t s ta te m en ts an d i nf orm at io n p ro vi de d b y

th e b oo kk eep er fo r CV Egg Farm an d Dav is on ’s cli en ts . From th es e so ur ces , res po nd en t d et erm in edth at Ced ar Val le y

rece iv edtwo types of i nc om e: (1) ad di ti on al in te res t i nc om e o f $1 6,8 33 , $6 2,5 00 , and$5 0,4 74 , in20 02 , 20 03 , and20 04 , res pe ct iv el y , fro m CV Egg Farm , and(2) co m

m is si on in co m e o f $4 0,0 00 an d $ 23 ,00 0, i n 2 00 3 and20 04 , res pe ct iv el y , fro m

lo an s m ad e to CV Egg Farm an d F rem on t Farm s. Res po nd en t 1 4 ad jus te d C ed ar Val le y ’s gro ss rece ip ts an d p ortfo li o i nc om e acc or di ng ly. Exc ep t fo r th e o ne -p ag e su m m ari es , pet it io ne r di d n otoff er an y ev id en ce t o sh ow tha t re sp on de nt ’s adju stm en ts were i nc orrect . Rath er, p et it io ne r rel ie s s ol el y on Davi so n’s t es ti m on y

th atCed ar Val le y ’s tax ab le in co m e was accurat el y reco rd edinth e o ne -p ag e su m m ary he pre pa redfor

each y ear a t i ss ue . Altho ug h Dav is on cla im s tha t Ce da r Val le y ev en tu al ly pai d the 3% 1 4 co m m is si on to Six -D In c., th ere i s n o wri tt enag reem en t b etweenCed ar Val le y an d Si x- D Inc ., andSix -D In c. di d n otha ve a ba nkacco un t o r ot he r rec or ds to co rro bo rat e Dav is on ’s cla im . Ind eed , acco rd in g t o C ed ar Val le y ’s ban k re co rd s, Dav is on , andno t Si x- D Inc ., pro babl y rece iv edan y

co m m is si on in co m e, whi ch Ced ar Val le y

tra ns ferr edto , in te r al ia , Davi so n’s co un try club, i nv es tm en t b ro ke r, an d M erri ll Ly

nc h a cco un t.- 16 -

[* 16 ] At tria l Dav is on tes ti fie d tha t the on e-p ag e su m m ari es di fferfro m

Ced ar Vall ey ’s ban k a cco un t s ta te m en ts an d o th er re co rd s b ecau se no t al l o f th e fl oc k lo antra ns act io ns ranth ro ug h C ed ar Val le y ’s ban k a cco un t. Acco rd in g t o Dav is on , th e fl oc k l oa n tran sa ct io ns di d n otsh ow up o n C ed ar Val le y ’s ban k
acco un t s ta te m en ts an d, i ns te ad , were rec or de d i n h is on e-p ag e su m m ari es us in g th e acc ru al m etho d o f acc ou nt in g. Us in g the accr ua l m etho d o f acc ount in g, Dav is on cla im edth atCed ar Val le y ge ne rat edin co m e an d i nc urredco rres po nd in g li ab il it ie s b y

gu aran te ei ng to rep ay

th e fl oc k l oa ns . Pet it io ne r di d n otpro vi de an y ev id en ce tha t Ce da r Val le y gu aran te edth e lo an s b etweenDavi so n’s cl ie nt s an d the eg g p ro du ct io n c om pa ni es . Excep t fo r cert ai n a ss ig nm en t an d p ur ch as e ag reem en ts with s om e o f Dav is on ’s cli en ts , Ced ar Val le y

was n ota pa rty to t he flo ckco nt ract s o r to an y othe r ag reem en t wi th Dav is on ’s cli en ts or t he eg g p ro du ct io n c om pa ni es . Furt he rm or e, th ere wer e n o writ te n g ua ran ti es fro m

Davi so n o r Ced ar Val le y , no r was th ere any evi de nc e o f Ced ar Val le y ’s li ab il ity

un de r a g ua ran ty becau se of d efau ltby the eg g p ro du ct io n co m pa ni es . Thu s, Dav is on ’s tes ti m on y reg ard in g C ed ar Val le y ’s pu rp orte d gu aran ty of th e fl oc k l oa n tran sa ct io n i s s el f-s erv in g andun co rro bo rat edan d i s th eref or e in su ffi ci en t t o e st ab li sh th atCed ar Val le y pro pe rly repo rte d i ts tax ab le in co m e an d e xp en se s fo r th e y ears at i ss ue . See, e.g ., Tok ars ki v. Co m m is si on er,- 17 -

[* 17 ] 87 T.C. 74 , 77 (19 86 ) (h ol di ng th atth e Co urt i s n otrequi redto acce pta pa rty’ s s el f-s erv in g t es ti m on y th atis un co rro bo rat edby pers ua si ve ev id en ce). Mo reo ve r, to th e ex te ntCed ar Val le y in cl ud edinit s g ro ss rece ip ts th e lo an am ount s tha t p as se d thr ou gh Ced ar Val le y fro m Davi so n’s cl ie nt s t o the eg g pr oduc ti on co m

pa ni es , th e lo an s ar e n otin co m e to Ced ar Val le y . Gener al ly, “ a ta xp ay er n eedno t treatas i nc om e m on ey s wh ic h h e d idno t re cei ve un de r a cl ai m of rig ht , whi chwere n othi s t o k eep , andwhi chhe was re qu ire d t o tran sm itto
so m eo ne els e as a m ere c on du it .” Diam on d v . Comm is si on er, 5 6 T.C. 5 30 , 54 1 (1 97 1) , aff’d, 4 92 F.2d28 6 (7 th Cir . 19 74 ). Thu s, m on ey a ta xp ay er re cei ve s i n hi s o r he r cap aci ty as a fi du ci ary orag en t d oe s n otco ns ti tu te in co m e to th at ta xp ay er. Herm anv. Co m m is si on er, 8 4 T.C. 1 20 , 13 4- 13 6 (1 98 5)
. At tria l the rev enue ag en t t es ti fie d tha t the de po si ts inCed ar Val le y ’s ban k
acco un t “ were m on ey

th atwas l oa ne d fr om

pe rs on s wh o wer e cl ie nt s o f Mr. Dav is on lo an edto Ced ar Val le y Egg Farm

an d F reem on t Fa rm s o f Io wa th ro ug h th e Ced ar Val le y

Bir d C om

pa ny ban k a cco un t.” Ce da r Val le y to okit s co m

m is si on fro m th e lo anam ou nt s d ep os it edinit s ac co un t. Acco rd in g t o Dav is on , Ced ar Vall ey wou ldco ll ectth e lo anam ou nt s i n i ts bankacco un t, an d a fte r de du ct in g Ced ar Val le y ’s comm is si on , wou ldtra ns fer the lo anam ount s t o the eg g pr oduc ti on co m

pa ni es . There fo re, Ced ar Val le y di d n otha ve co nt ro l o ve r th e lo an- 18 -

[* 18 ] am ou nt s d ep os it edinit s b an k a cco un t, b utrathe r was ob li ga te d t o tran sf er th e lo anam ou nt s t o the eg g p ro du ct io n c om pani es . Cf. Ben ne ttv. Co m m is si on er, 23 T.C. 10 73 , 10 79 (19 55 ). Thu s, the lo anam ou nt s d ep os it edinCed ar Val le y ’s ba nkacco un t d idno t co ns ti tu te in co m e to Ced ar Val le y ex cep t fo r an y co m m is si on in co m e al lo cat edto Ced ar Val le y . Accor di ng ly, res po nd en t p ro pe rly ad jus te d C ed ar Val le y ’s gro ss rece ip ts for20 03 an d 2 00 4 t o e xc lu de lo anam ou nt s de po si te d i n i ts bankacco un t. Pet it io ne r di d n otad dr es s the in te res t an d c ommis si on in co m e ad jus tm en ts . Acco rd in gl y , res po nd en t p ro pe rly adjus te d C ed ar Val le y ’s gro ss rece ip ts an d in crea se d i ts in te res t i nc om e in th e am ou nt s s tate d i n the FPAAs. B. Co stof Go od s So ldan d B us in es s Ex pe ns es Res po nd en t d et erm in edth atCed ar Val le y di d n othave co st s o f go od s s ol d fo r 20 03 an d 2 00 4. Re sp on de ntals o d et erm in edth atCed ar Val le y was n ot
en ti tl edto de du ctco ns ul ti ng expe ns es for th e y ears at i ss ue an d aco nt ractex pe ns e an d abankch arg e fo r 20 04 . At tri al Davi so n t es ti fie d tha t p et it io ne r co nc ed edth e co ns ul ti ng ex pe ns e fo r 20 02 . Davi so n fu rth er t es ti fie d tha t the co ns ul ti ng ex pe ns es for20 03 an d 2 00 4 s ho ul d b e co nt ractex pe ns es . Sect io n 1 62 (a) a ll ows a de du ct io n fo r or di na ry an d n eces sa ry

ex pe ns es pa id
orin curredby a tax pa y er i n c arrying ona tr ad e o r bu si ne ss . Dedu ct io ns are a- 19 -

[* 19 ] m atte r of

“ le gi sl at iv e g race ”, an d t ax pa y ers be ar the bu rd enof p ro vi ng th at th ey are en ti tl edto any

de du ct io ns cla im ed . See INDOPCO, In c. v. Co m m is si on er, 5 03 U.S. 79 , 84 (19 92 ); Ne w Col on ia l Ic e Co . v. Hel ve rin g, 2 92 U.S. 43 5, 4 40 (19 34 ). Taxp ay ers m us t m ai nt ai n s uf

fic ie ntreco rd s t o e st ab li sh th e am ount s o f al lo wab le de du ct io ns an d t o e nabl e th e Co m m is si on er t o d et erm in e th e ta xp ay ers ’ co rrec t t ax li ab il it ie s. See sec . 60 01 ; Sh ea v . Comm is si on er, 1 12 T.C. 18 3, 1 86 (19 99 ); s ec. 1 .60 01 -1 (a), In co m e Tax Reg s. As d is cu ss edab ov e, Ced ar Val le y di d n otm ai nt ai n s uf

fic ie ntreco rd s t o subs tant ia te it s t ax ab le in co m e an d e xp en se s fo r th e y ears at i ss ue . Ins te ad , pe ti ti on er re li es onDavi so n’s t es ti m on y th atCed ar Val le y ’s li ab il it ie s wer e accu rat el y

reco rd edinth e o ne -p ag e su m m ary he pre pa redforeach y ear a t i ss ue . Acco rd in g t o Dav is on , Ced ar Val le y in curredit s l iabi li ti es pri m ari ly by gu aran te ei ng to rep ay

th e fl oc k l oa ns un de r th e acc ru al m etho d o f acc ou nt in g and
su chli ab il it ie s wo ul d n otothe rwis e ap pe ar i n abankde po si ts an al y si s. 1 5 The on e-p ag e su m

m ari es , ho wev er, d o n otti e in to Ced ar Val le y ’s othe r reco rd s, an d Dav is on ’s sel f-s erv in g t es ti m on y is in su ffi ci en t t o e st ab li sh Ced ar Vall ey ’s deduc ti bl e ex pe ns es . Sim il arl y , Davi so n’s t es ti m on y reg ard in g C ed ar
Dav is on di d n otsp eci fy

whet he r Ced ar Val le y

rep orte d i ts li ab il it ie s fr om 1 5 lo angu aran ti es as aco stof g oo ds so ldor c on tra ctex pe ns es .- 20 -

[* 20 ] Vall ey ’s lo angu aran ti es , witho utfurth er co rro bo rat io n, i s i ns uf fic ie ntto
supp ort an y

li ab il it ie s C ed ar Val le y

all eg ed ly inc urredun de r th e acc ru al m etho d o f
acco un ti ng . Ced ar Val le y was n ota pa rty to t he flo ckco nt ract s o r to an y othe r co nt ractwith Dav is on ’s cli en ts or t he eg g p ro du ct io n c om pa ni es . Furt he rm or e, pe ti ti on er d idno t p ro vi de any writ te n g ua ran ti es fro m

Davi so n o r Ced ar Val le y or an y ev id en ce o f Ced ar Val le y ’s li ab il ity un de r a g ua ran ty becau se of d efau ltby the eg g p ro du ct io n c om

pa ni es . Any

co m mit m en t b y

Ced ar Val le y

to gu aran te e rep aym en t o f th e lo an s p lu s a r at e o f return was ora l an d s up po rte d o nl y by Dav is on ’s tes ti m on y . Accor di ng ly, si nc e Ced ar Val le y ha d n o l eg al ob li ga ti on to
m ak e an y paym en t o n the flo cklo an s, the re was no ba si s fo r anex pe ns e de du ct io n. Se e Wils onv. Co m m is si on er, 4 0 T.C. 5 43 , 55 1 (1 96 3)
. Acco rd in gl y , res po nd en t p ro pe rly adjus te d C ed ar Val le y ’s cos t o f go od s so ldan d b us in es s ex pe ns e d educ ti on s, an d p et it io ne r di d n otpro vi de any rel iabl e ev id en ce t o s ho w th atth es e ad jus tm en ts were i nc orrect .- 21 -

[* 21 ] The Co urt h as co ns id eredth e p art ie s’ arg um en ts an d, t o the ex te ntno t ad dr es se d h erei n, co nc lu de s tha t the y are m oo t, i rrel ev an t, o r witho utm eri t. To re fle ctth e fo reg oi ng , Deci si on s wi ll be en te red fo r res po nd en t.