NO T R EC OM M EN DE D F OR F UL L- TEX T P UB LIC AT ION F ile Nam e: 07a0040n.06 F iled: Janu ary 12, 2007 No. 05-6629 UN ITED STA TES C OU RT OF AP P EA LS F OR THE SI XT H C IR CU IT

ISSA C B . TI G RE TT II , Pla int if f- Ap pe lla nt,

v. UNITED STAT ES O F AMERICA, Def endant- Appellee

. ) ) ) ) ) ) ) ) ) ON AP P E AL F ROM THE UN I TE D ST AT ES D I STR I CT CO UR T F OR

TH E WE STE RN DI STRI CT OF TEN

NESSEE O P I N I O N

BEFORE: COOK and McK EAGU E, Circuit Judges; and WI LHOIT , District Judge. * Mc KE AG UE , Ci rc u i t Ju dge. Pl a in ti f f

- a p p e ll an t I s s a c B

. T ig r e tt I I filed amende d individual income tax ret u rn s fo r tax y ear s 1994-1997, see king r efunds of taxes paid. Bef

ore the I nterna l Revenue Service responde d to the amende d returns, Tig rett instituted this action to pre serve his rights

. Af

t er a benc h trial, the district court a war ded judg ment substantially in favor of

the United States, finding that Tig rett had f ailed to ca rry his burden of proving entitlement to the claimed business deductions. On appe al, we f ind no err or and there fore aff irm the judgme nt of

the district court for the re asons that follow.

________________________ * The Honorable Henry R. W ilhoit, J r., Senior United States District Judge f or the Ea stern District of Ke ntucky , sitti ng by desig nation.No. 05-6629

Tig re tt v . U nit e d S tat es

I n this court’s ca se ca

ptio n , ap p el l ant’s first name appe ars a s “I ssac.” I n the lower court 1 rec ord, his name is consistently spelled in the more c onventional way , “I saac .” While the dis c re pa nc y is n ote d in

a pp e lla nt’ s b ri e f at p. 1, n. 1, he ha s no t di rec tly a dv ise d w hic h v e rs ion

is corr ect a nd has not moved to correc t the case caption. He nce, a ppellant is ref

err ed to her ein as “I ssac.” - 2 -

I. F ACTUAL AND P ROCEDURAL BACK GR OUND Th e re le va

nt f a c ts a re largely un dis pu te d. Pla int if

f- a pp e lla nt I ssa c B . T ig re tt I I is a 1 develope r and pr omoter of r estaura nt and enter

tainment venues. H e cr eate d the orig inal “Ha rd Rock Café” in L ondon in 1971, and subsequently develope d and re fined the f ormula which ha s been duplicated in some 180 e stablishments in 60 countries worldwide. Dur ing the 1990s, Tigr ett soug ht to reproduc e his Har d Rock Café succe ss using a differ ent music theme, g ospel and blues music, matched w ith the cuisine of the Ame rica n South. He develope d, promoted, financ ed and ope ned the first “House of B lues” re staurant in Cambridg e, Massa chusetts in 1992. Fr om 1992 to 1997, he wa s chair man of the boa

rd of dire ctors and c hief e x ecutive of fice r of HO B Ente rtainment, Inc. (“ HOB ”), the c or po ratio n f or me d to de ve lop the Ho us e of B lue s c on c e pt. I t wa s in c on ne c tio n w ithhis e ff or ts to promote the House of

Blue s conce pt that T igr ett persona lly incurre d the $5 milli on expense which is at the ce nter of this litigation. T h e d i s t ri ct co u rt s u m m ar i z edt h e r el ev an tfa ct s an d h i s t o ry o f a d m i n i s t ra t i v e p ro ce ed i n gs

a s f oll ow s:No. 05-6629

Tig re tt v . U nit e d S tat es

The bombing at Centennial Park was an act of domestic terr orism that resulted in two deaths 2 and injuries to 111 per sons. Eric Robert Rudolph pleade d g uilty to the offe nse in 2005 a

nd has bee n se nte nc e d to lif

e imp ri so nme nt. - 3 - I n e arl y 19 96 , HO B wa s a ff or de d the op po rt

un ity to op e n a te mpo ra

ry Ho us e of B lue s v e nu e in C e nt enn ia l Park in A tla nta , G e or g ia , d

ur ingthe 19 96 Ol y

mpi c g ames. . . . Be cause some of the membe rs of the Bo ar d of Dire ctors of H OB wer e conce rned that the proposed Atlanta venue might not be suc cessf ul, Plainti ff, a long with board membe rs Dan A ckroyd and Kit Goldsbury , ag ree d that in the eve nt HOB los t mo ne y

in c on ne c tio n w iththe Ol y mpi c ve ntu

re the y wo uld c on tr ibute fu

nd s to c ov e r t he sh or tf a ll. [Ac c or din g to t

he la te r m e mor ia lize d Co ntr ibutio n A g re e me nt, Ac kr oyd a

nd Go lds bury

e a c h a g re e d to c on tr ibute up to $1 mil lio n and Ti g re tt u p to $5 mil lio n. ] . . . Th e re a fter, HOB re so lve d to a dv anc e up to $ 7, 00 0, 00 0 in connec tion with the House of Blues Atlanta ve nture a nd established a subsidiar y company , House of Blue s Atlanta, I nc. (“H OB Atlanta”) , to ope rate the t em p o ra ry venue in Atlanta. HOB provided all of the capital used by HOB Atlanta in oper ating the tempora

ry venue. H OB anticipated that the funds used for the tempora

ry venue in Atlanta would be r epaid f rom either the profits resulting from the venue or via the indemnification ag ree ment. Th e te mpo ra

ry ve nu e wa s se t up to o pe ra te duri ngthe At lanta

Ol y mpi c Ga me s, bu t wa s c los e d f

or fo ur and on e -h a lf da y s f oll ow ingthe e xplos ion

of a bo mb in C e nte nn ia l Park . U lti ma te ly , the a c c ounta nts fo r HO B de te rm ine d tha t H OB los t mo r e th an $ 1 0 , 0 0 0 , 0 0 0 f r o m th e o p e r a ti o n o f th e te mp o r ar y A tl an ta v e nue. On Oc tob e r 2 3, 19 96 , th e HO B Bo ard of Di re c tor s r e qu e ste d th a t Pla int if f h on or his ag ree ment to indemnify

HOB for such losses.

. . . [I ]n J anuar y of 1997

. . . Plaintiff paid HOB $5,000,000. Plaintiff was terminate d as C h i ef Executive Of fice r of HO B by

October of 1997 . . . . Dist ct. op. pp. 3-5, J A 20-22. 2

Plaintif f ti me ly f il e d tax r e tu

r n s f o r th e y e ar s 1 9 9 4 , 1 9 9 5 , 1 9 9 6 , an d 1997. On November 17, 2000, Plaintiff timely filed amende d tax re turns for 1994 , 1 9 95, 1996, and 1997, cla iming a r efund of Fe dera l income taxes in the amount of $34,846 for 1994, $143,043 f

or 1995, $121,075 for

1996, $12 2 , 7 6 4 for 1997 a nd $105,990 fo r 1 99 8. Th e a me nd e d r e tur ns c la ime d a loss fo r the y e ar 1 99 7 a nd a c arr y -b a c k to reduc e Plaintiff’s tax liability for 1994, 1995, a

nd 1996. Whil e the Interna l Revenue Se rv ic e iss ue d a re fu

nd fo r the y e ar 19 98 ba se d on a c arr y -f or wa rd of the 19 97 los s, the I nterna l Revenue Ser

vice took no ac tion reg arding Plaintiff’s 1994, 1995, 1996,No. 05-6629

Tig re tt v . U nit e d S tat es

- 4 - and 1997 tax re fund claims for more than a y ear afte r the re fund cla ims were f iled. Be cause the I nterna l Revenue Ser vice de clined to enter

an ag ree ment tolling the lim itatio ns pe ri od pr ov ide d by the I nte rn a l Rev e nu e Cod e , Pl a int if f f ile d th is s uit

to pr e se rv e his ri g hts . Pl a int if f e xha us te d a ll a dmi nis tr a tiv e re me die s a va ila ble to h im prior to filing this suit

. Id . at 2, J A 19. After denying cross-motions for summary judgme nt, the district court conduc ted a one -day be nc h tr ia l on

No ve mbe r 2 2, 20 04

. Ti g re tt wa s the on ly wi tne ss at tr ia l. Th e dis tr ic t c ourt e xpre ssl y fo un d T ig re tt t o b e c re dib le and fo un d his t e sti mony

to b e c on sis te nt w iththe a lle g a tio ns of his complaint and with the joint final pretrial orde r. The c ourt nonethele ss held, in releva nt part, that Tig rett had f

ailed to car

ry his bur den of demonstrating entitlement to c laim a deduction for the $5 mil lio n e xpe ns e e ith e r a s an o rd ina ry bu sin e ss e xpe ns e un de r 2 6 U .S. C. § 162, or a s a bu sin e ss l os s under 26 U .S.C. § 165(c)(1) . Since Ti g rett was not the prevailing party , his request for attorney ’s fe e s und e r 2 6 U .S. C. § 74 30 wa s a lso de nie d. Ti g re tt no w a pp e a ls a ll thr e e of

the se de te rm inatio ns . I n response , defe ndant-a

ppellee U nited States rene ws its jurisdictional challeng e.

II. JU RI SDI CT ION The g overnme nt contends that Tig rett di d not properly exhaust his admini strative re medies as to the particula

r theories which are the subject of this a ppeal, and that the district court there fore la c ke d ju ri sd ic tio n to e nte rt a in t

he m. H e nc e , th e argume nt g oe s, e ve n if this c ourt we re inc lin e d to

reve rse the district c ourt’s judg ment on the merits of Tig rett’s c laim, the district court lac ks juri s d ic ti o nto g r an t t

h e r e li e f s o u g h t. T h e d is tr ic t c o u rt s u mm ar il y r e je c te d th e ju r is d ic ti o n al

c ha lle ng e , c on c lud ing , u

po n r e vie w o f t

he re c or d, that T ig re tt’ s c la im f or re fu nd g e ne ra lly se t f or th the ma te ri a l f

a c ts; that th e c la im a de qu a te ly a le rt e d the I RS to the g ro un ds fo r r e fu nd ; and that T ig re ttNo. 05-6629

Tig re tt v . U nit e d S tat es

- 5 - had not asser

ted a whole new f

actua l basis or leg al theory in the court proc eeding s. The district court’s jurisdictional r

uling is subject to de novo revie w. Palkow v. C SX Transp., Inc. , 431 F.3d 543, 548 (6th Cir. 2005) (subjec t matter jurisdiction review ed de novo ); Lockhee d Martin Corp. v. United States , 210 F.3d 1366, 1370 ( Fe d. Cir. 2000) (var iance issue revie wed de novo ). The g overnme nt has corr ectl y s ta te d th e g e n e r a l p r o p o s it io n , summarized as follows in Y oung v. United States , 3 32 F .3 d 8 93 , 8 94 -9 5 ( 6th Cir . 2 00 3) : “F eder al cour

ts have no jurisdiction to ent er t ai n taxpay er a lleg ations that impermissibly

vary or aug ment the g rounds orig inally specifie d by the taxpay er in the administrative re fund cla im.” M c D o n n e ll v . U n it e d S ta tes , 18 0 F.3d 7 21 , 7 22 (6 th C i r. 1 9 9 9 ) ( qu o t i n g Charter Co. v. United States , 9 71 F.2 d 157 6, 15 79 (1 1th Cir .1 99 2) ). Th is r

ule pr e ve nts surp ri se and a de qu a te ly no tif ie s the I RS of

the c la im and its underlying f

acts. Id. Ac c or din g ly , “ [w]he n a pa rt y fa ils to st ate wi th specific ity

the g rounds for the ref

und, the court is without jurisdiction to enterta in the action.” Id. He nc e , s e ve ra l que sti on s ar e imp lic a te d b y the g ov e rnme nt’ s juri sd ic tio na l c ha lle ng e . H a s T ig re tt st at ed t h e as serted g rounds for the claimed r efund w ith sufficient spec ificity ? I s the claim stated

c le arl y e no ug h to a vo id u

nf a ir surp ri se and

a de qu a te ly

a pp ri se the g ov e rnme nt o f t he c la im a

nd its underlying f

acts? Do the g rounds for r elief a sserted in Tig rett’s c omplaint impermissi bly vary from those asser

ted in the administrative cla im for re fund? Tig rett conce des that his amende d tax re t u rn s do not asser t the specific I nterna l Revenue Code provisions under whic h he cla imed entitlement to refunds. Indeed , t h er e is no such require ment. Tig rett’s amended r eturns we re a ccompa nied, howeve r, by

a thre e-pa g e explanation of the undisputed fa cts said to justify the amende d returns a

nd the claimed de ductibility of his $5 milli on business loss or expense. Furthe r, none of the t heorie s asser ted i n the district court a ctionNo. 05-6629

Tig re tt v . U nit e d S tat es

- 6 - is stated any more specifica lly in his district court complaint than i n his amende d returns. I n other words, ther e is no materia l varianc e betwe en the a dminist rative c laim and the complaint. Nor is any theory that Tig rett ul timately asser ted i n the di strict court at odds with his administrative claim or his complaint. To be sure , the leg al theorie s could have been stated more spec ifically . Yet, the g overnme nt g ave T igr ett no rea son to believe his claim was too vag ue or indefinite. First, the I RS gra nted the claimed r efund f

or 1998, base d on the very same business loss asser ted in connec tion with the other y e ars . T his wo uld

a pp e ar t o im

ply that the I RS no t on ly un de rs too d bu t a lso a pp ro ve d of

his c la im. Second, the amended returns for 1994 throug h 1997 rema ined pendingfor ove r a y ear without any response from the I RS before Tigr ett decide d to file suit. During this ti me, the I RS di d not seek additional information or re spo n d i n an y fa shion that sugg ested the ne ed for g reater spec ificity

or clar ification. Third, e ven af ter the district c o u rt ac tion was commenc ed, the g overnme nt never moved for a more definite statement of Tig rett’s c laim. The g overnme nt first raised c oncer n about the spec i fi c nature of the g rounds for T igr ett’s claim in re sponse to his moti on for summary judgme nt. When the district c ourt overr uled the objec tion, the gove rnment subseque ntly conce ded jur isd ic tio n in

the pa rt ie s’ joi nt fi na l pr e tr ia l or de r. Th e g ov e rnme nt wa s the n a ff or de d a fu ll a nd fa ir opportunity

to contest ea ch of Tig rett’s theor ies on the merits in trial. Under these circ umstances, the sug g estion that the district court should have ref raine d from

e xer c isi ngjur isd ic tio n b e c a us e the g ov e rnme nt w a s unf a ir ly surp ri se d a

nd de nie d a fa ir op po rt un ity to resolve the matter administratively ring s hollow. There simply is no reason to c onclude that the g overnme nt’s handling of the c laimed re fund wa s in an y wa y p rejudiced as a r esult of Tig rett’sNo. 05-6629

Tig re tt v . U nit e d S tat es

- 7 - failure to orig inally

identify the pre cise leg al theorie s on which he relied. Considering this hist ory of pr oc e e din g s, we c on c lud e that Ti g re tt’ s a dmi nis tr a tiv e c la im c on ta ine d th e re qu isi te sp e c if ic ity to give the I RS adequa

te not ice of the grounds for ref und, and that the t heorie s asserte d in the district court did not impermissibly vary from the g rounds set for th in the administrative claim. The district court’s r ejec tion of the g overnme nt’s jurisdictional challeng e wa s theref ore pr oper. III . A NA LY SIS O F M ER ITS Ti g re tt c onte nd s th e dis tr ic t c ourt e rr e d, ho we ve r, on the me ri ts o f h is c la ime d d e du c tio ns . I ncome tax deductio n s ar e “m atters of leg islative g rac e” and ar e construe d strictly in favor of

the g overnme nt. Interme t Corp. & Subsidiaries v. Comm’r , 209 F.3d 901, 904 ( 6th Cir. 2 0 0 0). The taxpay er be ars the bur den of pr oving e ntitlement to a claimed deduc tion. Id . The district cour t’s finding s of fa ct ar e re viewed for clear error and it s applications of the l aw to the facts are revie wed de novo

. Friedman v. Comm ’r , 216 F.3d 537, 542 ( 6th Cir. 2000). A. § 162 Ordinary Bu siness Exp ense Tig rett conte nds his $5 mil l i o n pay ment to HOB pursuant to the Contribution Agr eeme nt was de ducti b l e as an o rdinary business expense under 26 U .S.C. § 162. The district court was satisfied that the pay

ment was made in relation to Tig rett’s business, but held the e x pense w as not “ordina ry .” Se c tio n 1 62 (a ) of th e Cod e a llo ws de du c tio n o f a ll “ or din ary and ne c e ssa ry e xpe ns e s p a id or incurr ed duringthe taxable y ear in car rying on a

ny trade or business.” 26 U.S.C. § 162(a) . As

a thr e sh old ma tte r, “ a

ta xpay e r’ s a c tiv iti e s f

a ll w ith in t

he sc op e of

§ 16 2 on ly if an int e nt t o p ro fi t has bee n shown.” Portland Golf Club v. Comm’r , 497 U.S. 154, 164 (1990). To be eng ag ed in aNo. 05-6629

Tig re tt v . U nit e d S tat es

- 8 - “tra de or business,” a taxpay er must be invol ved in the activity with continuity and reg ularity for the p u r p o s e o f i n c o m e o r

p r o f i t ; s p o r a d i c a c t i v i t i e s , h o b b i e s an d r e c r e a t i o n a l d i v e r s i o n s d o n o tqu a l i f y. Comm’r v. G roetzinger , 480 U.S. 23, 35 (1987). T o b e d e d

u c ti b le , an e xp e n s e mu s t b e “ o r d in ar y an d n e c e s s ar

y ” an d mu s t n o t b e a ca

pital expenditure. IN

DO PCO , I nc . v . Co mm ’r , 503 U.S. 79, 85-86 (1992). An “ or din ary

e xpe ns e ” is g ener ally one of “ common or fr equent oc curr ence in the t y p e o f b u s i ness involved.” Id. ( quoting Deputy v . Du Pont , 308 U.S. 488, 495 (1940)). Acapital e x penditure is one made to cr eate or

e nh anc e a se pa

rate and dis tin c t a sse t, on e that may be e xpe c te d to y ie ld b e ne fi ts b e y on d th e y e a r i n which the ex p en s e i s incurre d. INDOPCO, 503 U.S. at 86-87. Whether a pay ment is a curr ent expense, and ther efor e “or dinary” and de ductible, or, on the othe r han d, a non-de ductible ca pital expenditure, is a fact-spe cific question that may turn on distinctions of deg ree rathe r than of kind. Id . at 86. “Althoug h the mere prese nce of an incidenta l future be nefit—‘ some future a spect’— ma y not w ar r an t c a p it a li zati o n , a

taxp ay e r ’ s r e a li zati o no f b e n e f it s b e y o n d

th e y e ar in w h ic h the expen d i tu re i s i n cu rr edi s u n d en i ab l y i mp o rt an ti nd et er m i n i n g wh et h er t h e ap p ro p ri at e t ax t re at m ent is imm ediate de duction or ca pitaliz ation.” Id . at 87. Ap p ly ing the se standar ds to the rec ord fa cts, the district court, in re lation to the “trade or business” re quirement, noted the parties’ stipulation that Tig rett was “a developer and promoter of restaur ant and e ntertainment businesses.” Dist. ct. op. p. 16, J A 33. The c ourt found, base d on Tig rett’s testimony , t h at h i s s ucce ss as a de veloper and promoter

involved developinga bra nd identity for a particula

r concept restaurant and enter tainment venue, a

nd then continuously

building that brand nationally

and/or interna

tionally

. Id . at 16 -1 7, JA 33 -3 4. Th e Ho us e of Blu es Atla ntaNo. 05-6629

Tig re tt v . U nit e d S tat es

- 9 - venture aff

orded an opportunity to e x pose the House of Blue s brand to an inter national audienc e. Id . at 17, J A 34. The c ourt found the primary intended benefits of Tig rett’s a g ree ment to indemnify HOB wer e “to build the HOB brand and de velop intere st in a forthcoming initial publi c off eringof share s.” Id . at 14 , JA 3 1. F ind ingthat the se int e nd e d be ne fi ts wo uld se rv e no t only HO B ’s bu sin e ss int e re sts , b ut a lso Ti g re tt’ s p ro fe ssi on a l in te re sts a s a de ve lop e r an d pro mot e r, the dis tr ic t c ourt he ld that T ig re tt’ s “ do min ant mot ivatio n” fo r e nte ri ng int o the c on tr ibu tio n a g re e me nt wa s re la te d to h is trade or business. Id . at 12 n. 5, J A 29. “In particula r,” the court e x plained, “ the rec ord indicate s that Pla int if

f m ay have be e n mo tiv a te d to ind e mni fy the HO B At lanta

ve ntu re , at least

in p a rt , in order to convince the HOB Boa rd of Direc tors of hi s ability to promote t he grow th of t he compa ny and ther eby

secur e his position as Chairman and Chief Executive Of fice r.” Id

. The g overnme nt doe s not conce de that Tig rett wa s eng ag ed in a tra de or business, but neither does it contest the district cour t’s finding . I n response to T igr ett’s appellate arguments for a § 162 deduction, the g overnme nt stands on the corr ectn ess of the district c ourt’s holding that the

c on tr ibutio n p ay

me nt w a s n ot “ or din ary .” As to thi s ele me nt, the dis tr ic t c ourt re a so ne d a s f

oll ow s: Havingrevie wed the r ecor d and conside ring the re lev an t fa ctors, the Court finds that Plaintiff has failed to mee t his burden to prove that his indemnification pay ment was an “ordina

ry ” ex pense within the m eaning of § 162. Although Plaintiff c on te nd s that he ha s e nte re d int o sim ila r ind e mni fi c a tio n a g re e me nts in th e past (Tria l Tr. at 39-41) , there is no evidence in the rec ord to show that it is a common or fre quent occ urre nce in the r estaura nt and entertainment busi ness for an off icer of a corpor ation to m ak e a pe rsonal g uara ntee in an a

mount severa l times his annual salary to e ncoura g e the corpor ation to unde rtake a new venture

. Additional l y , t he c ourt fi nd s th a t, b a se d up on the e vid e nc e in t he re c or d, the pr ima

ry int e nd e d b e ne fi ts of Plaintiff’s indemnification of the venture wer e to build t h e HO B brand and develop inter est in a for

thcoming initial public offe ring of shar es . (Tria l Tr. at 29, 64.) Those be nefits would likely be re alized outside o f t h e tax able y ear – andNo. 05-6629

Tig re tt v . U nit e d S tat es

- 10 - t h e r e f o r e a r e m o r e a

p p r o p r i a t e l y t r e a t e d

a s c a p i t a l e x p e n d i tu r e s . A c c o r d i n g l y, Plaintiff’s claim that he is entitled to a de duction under § 162 must also fa il. Dist. ct. op. p. 14, J A 31. Tig rett conte nds the district court er red in holding the contribution pay ment to be a c apital

e xpe nd iture . H e ma int a ins tha t th e c on tr ibutio n p ay

me nt d id n ot c re a te or

de ve lop a

dis tin c t a sse t. Ye t, h e e nte re d in to t

he c on tr ibutio n a g re e me nt f or the d ua l pu rp os e s o f p ro mot ingthe name

rec og nition and goodw ill associated with HOB an d en h ancingor protec ting his re putation as an entre prene u r . M o n e y

s p e n t e n h an c in g r e p u tati o no r g o o d w il l i s g e n e r a ll y

d e e me d to b e a c a p ital expenditure, bec ause it is intended to cr eate a future benef it, r epre senting a capital a sset. See W elch v. He lvering , 290 U.S. 111, 115-16 (1933). A t the time he ac tually made the pa

y ment, howeve r, he contends ther e wa s no longe r a future benef it to be realized; the pay

ment was made only

to satisfy the ind e mni ty ob li gati on. M or e ov e r, he ins ist s th a t a lth ou g h c on tr ibutio n p ay me nts of thi s mag nitude may

not be c o m m o n ly

made by corpor ate of

fice rs, it is not an unusual undertakingfor someone in the tra de or business of developingconce pt restaur ants and e ntertainment ve nues. Tig rett’s a

rg uments are ultimately

unpersua sive. The notion of vi ew i ng the contribution pa y me nt s e pa rate ly fr om t he c on tr ibutio n a g re e me nt i s a rt if ic ia l and a t od ds wi th t

he c ourt ’s du ty

to undertake a f

act- specific inquiry

into the substance of

the transa ction. I n making this i n q u i ry and

asce rtaining Tig rett’s motives, the purpose for the a ctual pay ment cannot b e d i v o rc ed from the purpo se of Tig rett’s a ssumption of the indemnification obligation in the first place. Clea rly , if he had fa iled t o make the pr omised $5 mill ion indemnity pay ment, his reputation as a

n entre prene ur

w o u l d h a v e s u f

f e r e d g r e a t l y . I n T i g r e t t ’ s o w n w o r d s , “ M y r e p u t a t i o n i s k e y an d f o l l o w i n g wh a t INo. 05-6629

Tig re tt v . U nit e d S tat es

- 11 - say I ’m g oing to do is ve ry important to me , and I will do any thing to prote ct that re putation . . . .” Trial tr. p.40, JA 122. The ac tual pay ment was thus undeniably m ad e in servic e of his orig inal purpose, i.e. , to pr ote c t hi s r e pu ta tio n, a c a pit a l a sse t. M o r e o v e r , T i g r e t t ’ s c h ar a c t e r i z a t i o no f th e $ 5 m i l l i o nc o n t r i b u t i o np aym e n ta s an “ o r d i n a r y”

e xpe ns e rathe r t

ha n a c a pit a l e xpe nd iture is b e lie d by the “ Con tr ibutio n Ag re e me nt, ” wh ic h b y its very terms and form implies a contribution to capital. See N. Am. R ayon Corp. v. Comm’r , 12 F.3d 583, 586-87 (6th Cir. 1993) (g ener ally , taxpay er’ s arg ument for tax conse quence s at odds with form of t ransa ction must be supported by evidenc e of mistake, undue influence, fraud or duress). Tig rett’s char acte rization of the pay ment as ordinary is unde rcut also by his own testimony

that “[t] his was

a ver y abnorma l situation, very , very abnorma l”. . . “a once in a lifetime opportunity .” Trial tr. pp. 40, 60, J A 122, 142 . Whil e Tig rett testified that he , as an e ntrepre neur, ha d previously invested substantial personal f

unds to support a Har d Rock Café v en t u re, he did so then, too, not out of persona l profit motive, but to safeg uard his re putation. Id . at 39 -4 0, JA 12 1- 22

. Th e re c or d s imp ly fails to substantiate that an expenditure of this mag nitude by an individual entre prene ur, re imbursing corpor ate loss, comes w ithin the realm of “ normalcy ,” or “within the normal ove r-he ad [sic] or operating c osts of such [entrepre neuria l] activities,” such a s would justify treatment as an ordina

ry expense. See D eputy v . Du Pont , 308 U.S. at 496. Consid er i n g t h at the distinction between a n ordinary expense and c apital expenditure may depend on de g ree , rathe r than kind, the district court can ha rdly be fa ulted for its deter

mination that this persona l assumption and pay ment of a $5 mil lion ind e mni ty

ob lig a tio n, in c on ne c tio n w iththe un iqu e op po rt un ity po se d b y

the At lanta

Ol y mpi cNo. 05-6629

Tig re tt v . U nit e d S tat es

- 12 - Ga me s, and c ov e ri ngc or

po rate los se s unf

or e se e a bly oc c a sio ne d in

pa rt by an a c t of

dome sti c terror ism, was any

thing but “or dinary .” To the ext en t s u ch a finding entails fac t-finding , the district court, having c onducted the bench tr ial and had the opportunity to evaluate the cr edibility of the lone w itness an d assess the signific ance of trial exhibits , cannot be deeme d to have c lear ly err ed in i ts assessment of the rec ord. To the extent the determination that the pa y ment was not an or dinary expense entails a leg al conclusion, Tig rett has f

ailed to be ar his bur den of demonstrating e rror under the law. We find no

err or in the district court’ s rejec tion of Tigr ett’s claimed § 162 de duction. B. § 16 5( c )( 1) Busi ne ss L os s Ti g re tt als o co nte nd s his $5 milli on c on tr ibutio n pay me nt to H OB wa s a

los s in c ur re d b y him in a tr a de or bu sin e ss t

hat w a s n ot c omp e ns a te d for by ins ur anc e or

oth e rw ise , a

nd that sh ou ld there fore be allowe d as a de duction pursuant to 26 U.S.C. § 165(c)( 1). Ag ain, the district court wa s satisfied that Tig rett’s $5 million pay ment was made in r elation to his business of de veloping and promoting r estaura

nt and enter

tainment venues. It concluded, how ever , that the pay ment was not a “loss” inc urre d in a t rade or busi ness because it wa s made pursua nt to the indemnity

or contribution agr ee m en tt h at T i gre t tv o l u n t ar i l y en t er edi n t o wi t h o u tco n s i d er at i o n . C i t i n g A. Gi ur lan i &Br os . v. Comm’r , 119 F.2d 852, 857 ( 9th Cir. 1941), the cour t o bserve d that g ener ally , the voluntary pay ment of anothe r’s loss without any leg al obligation to do so does not qualify as a loss pursua

nt to § 165. Tig rett does not quar

rel with this ge nera l proposition. He admits that he rece ived no financ ial consideration for his promise to indemnify HOB . Yet, he i n s i s ts that he made the contributionNo. 05-6629

Tig re tt v . U nit e d S tat es

- 13 - pay me n t i n v o lu

n ta r il y , p u r s u an t t o a

le g a ll y b in d in g an d

e n f o r c e a b le a g r e e me n t. H e c o n te n d s the district court er

red by fa i l i n g t o distinguish betwee n the contribution ag ree ment and the pa y ment its e lf

. At the tim e he e nte re d int o the a g re e me nt to ind e mni fy HO B , vo lun tari ly or no t, Tig re tt contends ther e wa s no debt or loss for him to voluntarily as s u m e. When he a ctually made the $5 milli on pay

ment sever al months later, Tig rett conte nds he was under a leg al obl i gation to do so,

c on sis tin g of

the le g a lly

e nf or c e a ble c on tr ibutio n a g re e me nt. I n s up po rt , h e c ite s P utnam v. Comm’r , 352 U.S. 82 (1956). InPutnam , th e Sup re me Court re c og nize d, fo r p ur

po se s o f t he de d u c t i b ili ty of a no n- bu sin e ss ba d d e bt l os s, tha

t a “ ta xpay e r w ho vo lun tari ly buy s a de bt wi th kn ow le dg e that he wi ll no t be pa id is rightly co n s i d er ed n o t to have a cquire d a debt but to have made a g ratuity .” Id . at 88. The taxpay er in such a

case has not sustained a c og nizable loss. I n contras t , t h e court observed, the g uara ntor wh o p ay s a de bt fo r ano the r in c omp lia nc e wi th his ob lig a tio n un de r a c on tr a c t of

g ua ra nty sustains a deduc tible loss not by virtue of the pa

y ment to the creditor, but by virtue of the debtor’s ultimate inability

to fulfill its obligation to reimburse the guara ntor. Id

. at 88-89. As betwee n these two examples, Tig rett contends he is unlike the former inasmuch as he, at the tim e he e nte re d in to th e co ntr ibutio n a g re e me nt, did no t ha ve kn ow le dg e that H OB At lanta

wo uld su sta in los se s f

or wh ic h h e wo uld

have to i nd e mni fy

HO B . Wh e n h e did

make the pa

y me nt, it was not voluntarily , but in perfor mance of his leg ally

binding oblig ation, like the latter guara ntor in the Putnam example, who was de emed to have sustained a de ductible loss. T h e g o v e r

n m e n t , o n t h e o t h e r h an d , m a i n t a i ns tha t P u t nam supports its position. I ndeed, when Tig rett ente red into the c ontribution ag ree ment, he did so voluntar ily and g ratuitously , withoutNo. 05-6629

Tig re tt v . U nit e d S tat es

- 14 - c on sid e ratio n, and

wi th k no wl e dg e that if

HO B At lanta

did no t su c c e e d, he wo uld

be re sp on sib le to reimburse H OB for its investment loss without any expectation of re i m b u rs ement fr om HOB Atlanta. That i s , T i g rett, like the for mer taxpay er in the Putnam example, voluntarily assumed responsibility

for a ny loss with advanc e knowledge that he would not be paid. Thus, even unde r the teac hing of Putnam , Tig rett’s a ssumed obligation was a g ratuity , and is not a deduc tible loss. Mo re ov e r, a s th e g ov e rnme nt c or re c tly c on te nd s, if

the $5 mil lio n p ay

me nt was no t a g ratui ty , it w a s an inve stm e nt i n c a pit a l a sse ts ( i.e. , Tig re tt’ s re pu ta tio n a s a n e ntr e pr e ne ur

a s w e ll as HOB ’s bra

nd identity), which is not deduc tible as an ordina ry business loss und er § 165(c)( 1). See I n re Vaughan , 719 F.2d 196 ( 6th Cir. 1983) (holding t hat, t here being no economic dif fer ence be tw e e n d ir e c tly

inv e sti ngmon e y

in a c or po ra tio n a nd ind ir e c tly

inv e sti ngmon e y by pr omi sin g to pay corpor ate debts, losses resulting from both a ctivities a re proper ly treated the same, as ca p ital losses). Putnam thu s re pr e se nts on ly ill us or y su pp or t fo r Ti g re tt’ s po sit ion

. I t wa s no t unre a so na ble for the district c ourt to find the teac hing of Clark v. Kavanagh , 152 F.2d 49 ( 6th Cir. 1945), more instructive. I n Cla rk, th e ta xpay e r, a te sta me nta ry tr us te e , pa id an ob lig a tio n pur su ant to an e ig hty e ar- old ind e mni ty

a g re e me nt, an a g re e me nt wh ic h he ha d e nte re d int o fo r “ the pr e se rv a tio n o f h is reputation in financial circ les.” Id. a t 51 . T he c ourt “ a ssume d w ith ou t de c idi ng ” that th e tr us te e , in the execution of the trust, wa s eng ag ed in business. Id . Nonethele ss, alt h oug h the pay ment was made pur suant to a leg ally binding oblig ation, the o b l i g ation was de emed to be a persona l one, g ratuitously

or voluntarily

assumed. This pre exis ting voluntar y cha ra ct er o f t he oblig ation was deeme d to “merg e” w ith the actual pa y ment, rende ring the pay

ment itself persona l or voluntary , too.No. 05-6629

Tig re tt v . U nit e d S tat es

- 15 - That is, the pay

ment was de emed to be ne ither a loss i ncurr ed in the di schar g e of his duti es as trustee nor a loss incurr ed in a t ra n s ac t i o n en t ere d into for profit. Id . The pa y ment was not a “ loss.” Acc ording ly , the pay

ment was held not to be deductible as a loss incurre d in a tra de or business, or

a s a los s in c ur

re d in a tr ans a c tio n e nte re d in to f or pr of it. Ti g re tt a rgue s th a t Cla rk

is factua lly

distinguishable. Ye t, Tigr ett has conc eded that he, like the trustee in Cla rk, enter ed int o the contributi on ag ree ment without any expectation of prof

it. See Besseny ey v . Comm’r , 3 79 F .2 d 2 52 , 2 56 (2 d Ci r. 19 67 ) ( “ Th e e sta bli sh e d r ule , a pp ro ve d b y

thi s circ uit and others, is that deduc tibili ty of ‘business-like’ expenses or losses is d en i ed unless the taxp ay er can showan intention to seek prof it.”) F urther, T igr ett, like the Cla rk trustee, wa s mot ivate d to e nte r i nto the ind e mni ty a g re e me nt i n pa

rt by a de sir e to p re se rv e and

e nh anc e his pr of e ssi on a l r e pu ta tio n. Mo re ov e r, his a g re e me nt t o ind e mni fy HO B , li ke the tr

us te e ’s ind e mni ty ag ree ment in Cla rk, w a s n o ti n t e g r a l t o h i s o f f i c i a l r o l e o r

b u s i n e s s ; i tw a s p e r s o n a l an d v o l u n t a r y. Al l of these c onsiderations support the district cour t’s conclusion that the fa cts of Clark are sufficie ntly

analog ous and its analy sis persuasive. Tig rett ar g ues Clark is disti ng uishable bec ause the trustee’ s i n d em nity pay ment was not found to have been ma de in the trustee’ s trade or business, where as he w as eng ag ed in his trade or business as a de veloper

and promoter

. Whil e the Six th Circ uit in Cla rk did not identify

the trade or business in w hich the trustee made the indemnity pay ment, it ex pressly

“assumed,” for pur

poses of it s an a ly s is , th a t h e w a s e n g a g e d in a tr a d e o r b u siness. Clark, 152 F.2d at 51. The cla imed deduction was denied in Clark not be cause the trustee was not eng ag ed in business, but beca use the indemnity

pay ment was, due to the personal and volunt ary nature of the oblig ation undertaken, notNo. 05-6629

Tig re tt v . U nit e d S tat es

- 16 - a “loss.” This, and not the t rade or busi ness eleme nt, repre sented the ra tio de c ide nd i for the holding in Cla rk

. He n ce , th e d i s t r i ct co u rt , i nfo l l o wi n g Cla rk, rig htly focuse d on the voluntariness of Ti g re tt’ s c on tr ibutio n pa

y me nt, ste mmi ngfr om t

he vo lun tary

natur e of the c on tr ibutio n a g re e me nt, as disqualifying it fr om deductibility as a business “ loss.” On the pre sent rec ord, we conclude that Tig rett has f ailed to carr y h is burden of demonstrating entitlement to the deduction. Putnam repr esents only weak support for his ar g ument and he ha s failed to per suasively distinguish the Six th Circuit case la w prope rly

relied on by

the district court. Henc e, we find no err or in the district c ourt’s judg ment reje cting the sec ond asser ted basis for the c laimed deduc tion. C. Estoppel Finally , T i gre t t co n t ends t he g overnme nt should be estopped to deny him the claimed deduction for

y ear s 1994-1997 wher e it approve d the same c laimed deduc tion for 1998. Indeed, the only explanation for the inconsistent treatment of th e cl ai m ed deduction in 1998 is that a mistake was made by

the I RS. On thi s point, the di s t ri ct cour t ag ree d with the g overnme nt that the I RS’s

e rr on e ou s tr e a tme nt o f a

n is su e on e y e ar do e s no t pr e c lud e its su bs e qu e nt c or

re c tio n o f i ts e rr or

in other tax y ear s. See Knights of Columbus Council No. 3660 v. United States , 7 83 F .2 d 6 9, 73 (7 th Cir. 1986) (“T he doctr ine of e quitable estoppel is not a bar to the corr ection by

the Commiss ioner

o f an e r r o r o f l a w. ” ); Ha w ki n s v. Comm’r , 7 13 F .2 d 3 47 , 3 51 -5 2 ( 8th Cir . 1 98 3) (s a me ). I n f

a c t, althoug h there is no hint of detrimental relianc e by Tig rett o n t h e I R S ’s error in this case , the Commi ssioner has the power to corr ect lega l err ors retroactively even though the ta x pay er ma y haveNo. 05-6629

Tig re tt v . U nit e d S tat es

- 17 - d et ri m entally

relied on the err or. Knights of Columbus , 7 8 3 F

. 2 d

a t 7 3

. T ig r e tt ’ s ar g u me n t f or estoppel is there fore unavailing

.

IV . C ON CL USI ON Entrepr eneur

I ssac Tig rett under

took a hug e fina

ncial g amble in f

urthera nce of his personal

and pr of e ssi on a l in te re sts a

nd be c a me the vic tim of un fo rt un a te and un fo re se e a

ble c ir c ums tanc e s. His attempts to soften the blow throug h claimed de ductions from his inco m e tax liability have proven unsuc cessf

ul. On appe al , we must conclude , as we construe inc ome tax deductions under the I nterna l Revenue Code stric tly in favor of

the g overnme nt, that he has failed to car ry his burden of de m o n s t r a t i n g e r

r o r i nt h e d i s t r i c tc o u rt ’ s j u d g m e n t

. T h e c l a i m e d d e d u c t i o n s w e r e p r op e rl y denied. I t follows that his claim for attorney ’s fees, as preva iling party , was also properly denied. F or the fo re g oin g re a so ns , th e jud g me nt o f t he dis tr ic t c ourt

is i n a ll r e sp e c ts AF F IRMED.