T.C. Mem o. 2 01 5- 13 1

UNITED STAT ES TAX COURT

CHRIS TOPHER HOLDEN AND KA REN A. HOL DEN, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 14 91 5- 11
. Fi le d J ul y 16 , 20 15
.

In 2 00 7 P -H op erat eda m ed ic al pra ct ic e th ro ug h h is who ll y own ed S co rp or at io n (S ). On i ts 20 07 Fed eral in co m e ta x re tu rnS rep orte d in co m e an d c la im edde du ct io ns forvario us ex pe ns es . S rep orte d a ne t l os s fo r th e y ear, wh ic h fl owe d thr ou gh to Ps’ 20 07 tax return. R co nt en ds th atPs r ecei ve d b utfai le d t o re po rt a dd it io na l i nc om e fro m S’s bu si ne ss an d tha t Ps fai le d t o s ub st an ti at e m an y of t he ex pe ns es un de rlyin g S ’s cla im edde du ct io ns . Held : Ps est ab li sh edby a prep on de ran ce o f th e ev id en ce tha t s om e of th e al le ge d u nr ep orte d i nc om e co ns is te d o f no nt ax ab le lo an pr oc eed s, b utth e b al an ce co ns ti tu te s t ax ab le in co m e. Held , furth er, Ps ad equa te ly sub st an ti at edso m e, bu t n otall , of the ex pe ns es forwhi chS cl ai m edde du ct io ns . R pro pe rly dis al lo wed de du ct io ns forth e ex pe ns es th atPs h av e n otad equa te ly sub st an ti at ed
. Held , furth er, Ps are l iabl e fo r th e I.R.C. s ec. 6 66 2( a) ac cu racyrel at edpe na lty .- 2 -

[* 2] W al te r D. Cha nn el s, fo r pe ti ti on ers . Je nn y R. Cas ey an d Dav idJ. Warner , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION
W HERRY, Ju dg e: Res po nd en t d et erm in eda $2 54 ,95 1 d efi ci en cy in pe ti ti on ers ’ 20 07 Fed eral in co m e ta x anda $5 0,9 90 sec ti on 66 62 (a) a ccu racy- 1 rel at edpe na lty . After

th e fi li ng of ast ip ul at io n o f fac ts , sec on d s ti pu la ti on of 2 fact s, an d s ti pu la ti on of s et tl edis su es , th e fac ts of wh ic h are ag reedto by the 3
Co nc urren tl y

with o urco ns id erat io n o f Dr. Hol de n’s 2 00 7 t ax y ear, h is 1 20 08 an d 2 00 9 t ax y ears were b efo re an ot he r Ju dg e o f th is Co urt, wh o i ss ue d an op in io n a s t o tho se tax y ears inHol de n v . Comm is si on er, T.C. Mem o. 2 01 5- 83
. The two cas es featur e so m e co m m on ch arac te rs an d i ss ue s, b utth ey were trie d se pa rat el y

an d h av e d is ti nc t ev id en ti ary reco rd s. We app ly the law an d re nd er o ur op in io n o n the ba si s o f th e te st im on y an d d oc um en tary

ev id en ce i n the reco rdof th is cas e. 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), as am en de d andineffe ctforth e ta x year atis su e, an d a ll Ru le refe ren ces are t o the Tax C ourt Rul es of P ract ic e an d P ro cedur e. W e ro un d a ll am ou nt s t o the ne ares t d ol lar. Inth e st ip ul at io n o f se tt le d i ss ue s: (1) res po nd en t co nc ed edth atpe ti ti on ers 3 were en ti tl edto de du cta $1 35 ,80 4 n etop erat in g l os s ca rry fo rward ; (2 ) pe ti ti on ers co nc ed edth atth ey

rece iv edbu t fa il edto rep ort a $ 1,6 86 tax ab le refu ndof Cal ifo rn iain co m e ta x; an d (3 ) pe ti ti on ers co nc ed edres po nd en t’s el im in at io n o f th e in co m e an d e xp en se s the y ha d re po rte d o n S ch edul e C, Pro fitor Lo ss Fro m Bu si ne ss , as wel l as res po nd en t’s tran sf er o f th e am ou nt s o f th os e o rig in al it em s t o (co nt in ue d...)- 3 -

[* 3] pa rti es an d i nc or

po rat edhe rei n b y

th is refe ren ce, the is su es rem ai ni ng for de ci si on are: (1 ) whe th er p et it io ne rs rece iv ed , bu t fa il edto rep ort, $ 17 1,1 77 of t ax ab le in co m e fro m

Ch ris to ph er Ho ld en ’s who ll y own edS co rp or at io n, Ch ris to ph er Hol de n M D, Inc . (CHMD), fo r 20 07 ; (2 ) whe th er, an d i f so to whatex te nt , pet it io ne rs m ay de du ct$3 87 ,44 2 o f pa ss th ro ug h l os s fr om

CHMD, co m

pr is in g the fol lo win g e xp en se s al le ge dl y pa id by CHMD du rin g 2 00 7: $1 11 ,13 8 o f sa larie s an d/ orwage s, $ 80 ,30 0 o f equi pm en t
ren ta l ex pe ns es , $8 0,0 99 of i nt eres t ex pe ns es , $4 1,1 22 of d ep reci at io n, $ 11 ,61 3 o f
supp li es ex pe ns es , $3 6,2 58 of o ffi ce ex pe ns es , $6 ,40 1 o f du es an d s ub sc rip ti on s
ex pe ns es , $9 ,97 0 o f co nt ractlab orex pe ns es , and$1 0,5 41 of aut o andtru ck
ex pe ns es ; an d

(...co nt inue d) 3 Ch ris to ph er Ho ld enMD, In c.’s Fo rm 11 20 S, U.S. Inc om e Tax Return fo r anS Co rp or at io n, an d u lt im at el y to pe ti ti on ers ’ Sch edul e E, Sup pl em en ta l In co m e an d Los s. Inth e st ip ul at io n o f fac ts , res po nd en t co nc ed edso m e o r al l o f th e di sa ll owe d d educ ti on s fo r vario us cat eg or ie s o f rep orte d e xp en se s, thu s n arro win g th e d educ ti on am ou nt s atis su e h ere. No twi th st an di ng pe ti ti on ers ’ co nc es si on co nc ern in g the ir C al ifo rn iain co m e ta x re fundinth e st ip ul at io n o f se tt le d i ss ue s, res po nd en t co nc ed edth is is su e in hi s o pe ni ng bri ef. Inhi s an swe rin g b rie f res po nd en t av ers th atth e p art ie s wi ll reco nc il e th ei r co nt rary con ces si on s i n the Ru le 15 5 c om

pu ta ti on .- 4 -

[* 4] (3 ) whe th er p et it io ne rs are l iabl e fo r th e se ct io n 6 66 2( a) ac cu racy-rela te d pe na lty . FINDINGS OF FACT 4 Pet it io ne rs Ch ris to ph er an d Kar enHol de n l iv edinCal ifo rn iawhen th ey fil ed th ei r pe ti ti on . They fil eda joi ntFed eral in co m e ta x re tu rnfor20 07 bu t wer e di vo rcedinAug us t o f th aty ear. Ch ris to ph er Ho ld enis a do ct or with afam il y pr act ic e sp eci al iz in g i n g eri atric m ed ic in e. KarenHol de n t each es hi gh sch oo l. I. CHMD Dur in g 2 00 7 Dr. Ho ld enop erat edhi s m ed ic al pra ct ic e en ti rel y th ro ug h h is who ll y own edS co rp or at io n, CHM D. At th e b eg in ni ng of 2 00 7 C HMD ha d two of fic es , on e inOran ge , Cal ifo rn ia(Oran ge off ic e), an d the othe r in Anah ei m , Cal ifo rn ia(Ana he im

off ic e). The Oran ge off

ic e p red at edth e Ana he im off ic e, whi chop en edin20 04 . In ad di ti on to see in g p at ie nt s atth es e two off ic es , Dr. Hol de n ty pi cal ly spe nthi s m orni ng s v is it in g n on am bu la to ry pa ti en ts at b oa rdan d
care faci li ti es , sk il le d n ur si ng faci li ti es , ass is te d l iv in g fa ci li ti es , andCh ap m an Hos pi ta l. He s om et im es returne d t o the se rou nd s i n the lat e aft ern oo n o r ear ly

The Co urt cr eat edsev eral sch edul es su m m ari zi ng an d s ynt he si zi ng 4 ev id en ce i n the reco rdto aidit s an al y si s o f th atev id en ce. We hav e at ta ch edth os e sc he du le s as ap pe nd ic es to th is op in io n.- 5 -

[* 5] ev en in g a fte r se ei ng pa ti en ts at h is off ic es . In 2 00 7 Dr. Ho ld enha d n o bu si ne ss act iv it ie s o r m at eri al so ur ce o f in co m e o th er tha n h is m ed ic al pra ct ic e. A. Offi ce St aff At the be gi nn in g o f 20 07 CHMD em pl oyed ab ou t 2 5 p eo pl e, so m e o f who m were i nd ep en de ntco nt ract or s. Jo hn Rh on do , who ha s wo rk edas abu si ne ss co ns ul tantsi nc e 1 98 8, p rimaril y fo r m ed ic al pra ct ic es , serve d a s C HMD’s pr act ic e m an ag er dur in g 2 00 7. Inth at cap aci ty, he ov ers aw th e p ract ic e an d s ou gh t t o i m pr ov e it s p ro fit ab il ity

an d effi ci en cy . Ja ne Garci a p ro vi de d m an ag em en t s erv ic es to CHMD as anin de pe nd en t
co nt ract or

fro m Feb ru ary 20 04 th ro ug h app ro xi m at el y Aug us t 2 00 9. When pr ov id in g s erv ic es to CHMD s he ge ne ral ly sharedanoff ic e wit h Dr. Ho ld enat CHMD’s Oran ge off

ic e. Ms . Garci a’s du ti es co ns is te d o f pa y in g b il ls , m an ag in g th e two off

ic es an d the ir s ta ffs , andm ai nt ai ni ng CHMD’s b oo ks us in g Qu ic kb oo ks
so ftwa re. Bec au se Ms . Garci a o fte n dro ve ba ck an d fo rth be twee n the two off ic es
an d a ls o t o o th er l oc at io ns forpro jects ne ces sa ry

forth e b us in es s, as part o f he r fee
co m pe ns at io n Dr. Ho ld enso m et im es wrot e se pa rat e ch eck s t o h er i n the am ou ntof he r m on th ly car paym en ts .- 6 -

[* 6] Drs. Dep in de r Man n andEdwardM. Andujar , each of wh om als o h adhi s o r he r own sep arat e m ed ic al co rp or at io n, wo rk edforCHMD as co ntract or s an d s aw pa ti en ts at i ts Anah ei m

off ic e. Nurs e p ract it io ne r Don naDo an d o ffi ce m an ag er Ninpaph a Nia ng no ua ns y

als o wo rk edat t he Anah ei m off ic e. Je nn ife r M. Ri ve ra
worke d a s a m ed ic al ass is tantat t he Oran ge off ic e. Duri ng 20 07 CHMD m ad e pa ym en ts to Drs. Ma nn an d An du jar, Ms . Do, Ms . Nian gn ou an sy, andMs . Riv era
as co m pe ns at io n fo r th ei r se rv ic es . B. Offi ce Adm in is tra ti on CHMD re li edon a pa y

ro ll pro ces si ng co m

pa ny, Aut om at ic DataPro ces si ng (ADP), to pre pare i ts payro ll ch eck s. Fo r eac h p ay pe rio d, M s. Garc iawou ld te le ph on e ADP to rep ort the ho ur s wo rk edby each e m pl oyee an d i nd ep en de nt
co nt ract or

on CHMD’s p ayro ll . ADP wou ldth enpre pa re an d d el iv er the payro ll ch eck s t o C HMD, to be si gn edby eith er Dr. Hol de n o r Ms . Garci a an d the n di sb ur se d t o the st aff. Ms . Garci a k ep t CHM D’ s b oo ks . She en te redbi ll s i nt o Qu ic kb oo ks as pa y ab le s upo n re cei pt , up da te d the en tri es to refl ectpaym en t wh ensh e wro te ch eck s o r m ad e o nl in e p aym en ts , andm ai nt ai ne d h ardco py reco rd s wi th
an no tati on s i n v en do r-s pe ci fic fol de rs . Ms. Gar ci a cl as si fie d C HMD’s ex pe ns es withi n v ari ou s av ai labl e Qui ckbo ok s ca te go rie s. Anun rel at edco m pa ny woul d- 7 -

[* 7] rev ie w CHMD’s bo ok s qua rte rly andwou ldso m et im es su gg es t tha t ce rta in
ex pe ns es be recl as si fie d. Ms . Garci a wou lddi sc us s the se su gg es ti on s wi th Dr. Hol de n andm ak e ad

jus tm en ts if app ro pr ia te . CHMD m ai nt ai ne d o nl y

on e b an k a cco un t dur in g 2 00 7, a c he ck in g a cco un t atBan k o f Am eri ca (B of

A acco un t). Dr. Ho ld enm ai nt ai ne d asep arat e, pe rs on al
acco un t atCal Nati on al USBan k. Ms . Garci a an d Dr. Ho ld enwere b ot h s ig ne rs on th e Bo fA acco un t, an d M s. Garc iaso m et im es pa idbi ll s fr om th e acc ou ntth ro ug h
anon li ne bi ll pa y

featur e rathe r th anby writ in g o utch eck s. Als o dur in g 2 00 7, CHMD m ai nt ai ne d o r es tabl is he d b us in es s cr ed itcardacco un ts with Ad va nt a Ban k Co rp . (Adv an ta ), Am eri canExp res s, an d P la ti nu m Plu s. C. Offi ce Equi pm en t Dur in g 2 00 7, i n a dd it io n t o m ed ic al care CHMD p ro vi de d c os m et ol og y
se rv ic es . Thes e se rv ic es , whi chin cl ud edin jecti on s, l as er the rap ie s fo r sk in bl em is he s an d c an cer b io ps ie s, an d ask in -ti gh te ni ng tre atm en t kno wn as The rm ag e, requi redsp eci al iz edequi pm en t. CHM D lea se d m os t o f th e equi pm en t inth e Ana he im

off ic e, in cl ud in g the Therm ag e m ach in e, acu li gh t l as er, h y pe rb ari c ch am be r, in frar edsau na , andpu ro flo w. CHMD ha d p ur ch as edothe r equi pm en t i n th e Ana he im

off ic e, in cl ud in g the X-ray m ach in e. Sim il arl y , CHMD h ad pu rch as edth e X-ray m ach in e atth e Oran ge off ic e an d o wne d i ts sca le s,- 8 -

[* 8] st etho sc op es , ech os co pe s, au to cl av e fo r st eri li zat io n, an d s ur gi cal in st ru m en ts . CHMD al so lea se d n on m ed ic al equi pm en t, s uc h a s i ts co py m ach in es an d the equi pm en t as so ci at edwith i ts sec ur ity syste m . CHMD l eas edit s re nt edequi pm en t fr om a va rie ty of ve nd or s. Th es e
ve nd or s i nc lu de d LFG, MB F Leas in g, HPS C, IFC C red itCo rp ., GreatAm eri ca, Ban c o f Am eri ca Leas in g, Co m pa re Bu si ne ss Sy st em s, In c., Pro te ct io n On e, an d GE Healthc are F in an ci al Serv ic es (GE). Thes e co m pa ni es bi ll edCHMD, u su al ly 5
m on th ly, an d M s. Garc iapa idth e b il ls on th ei r st at eddu e d at es . Whe n s he
rece iv edbi ll s fr om

lea si ng co m

pa ni es , Ms . Garci a wou lden te r th em in Qui ck bo ok s. On o r ab ou t Dec em

be r 29 , 20 06 , CHMD an d two l es so rs , Key Equ ip m en t Fi na nc e, In c. (Key ), an d M arl inLeas in g (M arl in ), en te redin to ag reem en ts lab el ed
as lea se s (p ur

po rte d l eas es ). The p ur

po rte d l eas es co ve redid en ti cal set s o f equi pm en t, i nc lu di ng co m pu te r an d p rin te r se rv ers , so ftwa re, equi pm en t fo r a l oc al
areane two rk , andlap to p c om pu te rs . Each p ur

po rte d l eas e id en ti fie d the “ ve nd or ” fo r th es e it em s as Med So ft S ol ut io ns , Inc . (Med so ft) . Marl inpu rch as edfro m GreatAm eri ca i s al te rn at el y id en ti fie d o n c an cel edch eck s, b an k 5 st at em en ts , andCHMD’s p ro fitan d l os s s ta te m en t (P &L) as “ GreatAm eri ca”, “ GreatAm eri ca Leas in g” , “ GreatAm eri ca Leas in g C or p” , “ Great am eri ca Leas in g Co rp ”, an d “ GreatAm eri canLeas in g C or p.” Sim il arl y , Ban c o f Am eri ca Leas in g so m et im es ap pe ars as “ Ban k o f Am eri ca”.- 9 -

[* 9] Med So ft t he it em s co ve redby its pu rp orte d l eas e atCHMD’s reque st . CHMD
us edth e equi pm en t ac qu ire d fr om Key at i ts Oran ge off

ic e an d the equi pm en t acqui redfro m

Marl inat i ts Anah ei m

off ic e. Eachpu rp orte d l eas e p ro vi de d fo r an in it ia l, l um

p- su m paym en t fo ll owe d b y

60 equa l m on th ly paym en ts . The Ma rli n ag reem en t was , by it s t erm s, i rrev oc ab le , andth e ag reem en t wi th Key
un co nd it io na ll y

m an da te d tha t CHM D pay all am ou nt s due th ereu nd er. Purs uantto th e p ur

po rte d l eas es CHMD m ad e th e fo ll owi ng paym en ts , each
co ns is ti ng of aba se lea se ch arg e an d i n s om e in st an ces tax es an d fe es , to Marl in
an d Key: 6

Pet it io ne rs ob ta in edth e p ur po rte d l eas e wit h M arl inan d re late d d oc um en ts 6 fro m Marl invi a subp oe na . The d oc um en ts in cl ud e a “ Paym en t Hi st ory Rep ort” th atrefl ect s re cei ptof p aym en ts fro m CHMD dur in g 2 00 7 andin di cat es th atth e ch eckam ou nt s i nc lu de d v ari ou s t ax es an d fe es inad di ti on to th e b as e m on th ly ch arg e. Ms . Garci a rec or de d i nt eres t an d fi na nc e ch arg es ass oc ia te d wi th ex pe ns es un de r se pa rat e Qui ckbo ok s ca te go rie s, an d C HMD’s P&L ref le ct s tha t sh e rec or de d t ax es an d o th er fe es pa idto Marl inLeas in g u nd er s ep arat e Qui ck bo ok s ca te go rie s. We hav e o m it te d p aym en ts forwhi chth e rep ort i nd ic at es CHMD’s ch eck s wer e returne d a s u np ay ab le
. The pu rp orte d l eas e wit h Key sp eci fie s m on th ly paym en ts of $ 1,3 78 , and we ha ve id en ti fie d 1 0 p aym en ts inth is am ou nt , on e ineach m on th othe r th an Feb ru ary, on CHMD’s b an k s ta te m en ts . For m os t o f th e p aym en ts , th e st at em en ts si m pl y li sta ch ecknu m

be r, bu t i n two i ns tanc es , th ey id en ti fy Key as t he pay ee.- 10 -

[* 10 ] Pay da te Paym en t

fo rm Tot al

pa ym en t Am ou nt

al lo cab le to ba se lea se ch arg e Payee 1/ 2/ 20 07 Cas h $2 ,86 1 $2 ,58 6 Mar li n 1/ 2/ 20 07 Dire ctde bi t 28 81 2,8 81 Key 1 2/ 15 /2 00 7 Ch eck21 84 1,4 17 1,2 93 Mar li n 3/ 12 /2 00 7 Ch eck22 56 1,5 87 1,2 93 Mar li n 3/ 12 /2 00 7 Ch eck22 49 1,3 78 1,3 78 Key 4/ 9/ 20 07 Ch eck23 22 1,3 78 1,3 78 Key 4/ 10 /2 00 7 Dire ctde bi t 1,3 93 1,2 93 Mar li n 5/ 4/ 20 07 Dire ctde bi t 1,3 78 1,3 78 Key 5/ 16 /2 00 7 Ch eck86 67 1,3 93 1,2 93 Mar li n 6/ 7/ 20 07 Dire ctde bi t 1,3 78 1,3 78 Key 6/ 14 /2 00 7 Ch eck88 61 1,7 05 1,2 93 Mar li n 7/ 3/ 20 07 Ch eck88 36 1,3 78 1,3 78 Key 7/ 16 /2 00 7 Ch eck86 68 1,3 93 1,2 93 Mar li n 8/ 2/ 20 07 Ch eck89 21 1,3 78 1,3 78 Key 8/ 20 /2 00 7 Ch eck89 91 1,4 52 1,2 93 Mar li n 9/ 4/ 20 07 Ch eck89 22 1,3 78 1,3 78 Key 9/ 13 /2 00 7 Ch eck89 90 1,4 52 1,2 93 Mar li n 10 /9 /2 00 7 Ch eck89 86 1,3 78 1,3 78 Key 11 /5 /2 00 7 Ch eck25 45 1,3 78 1,3 78 Key 11 /9 /2 00 7 Ch eck25 54 1,6 46 1,2 93 Mar li n 12 /5 /2 00 7 Ch eck26 19 3,1 28 2,5 85 Mar li n- 11 -

[* 11 ] 12 /5 /2 00 7 Ch eck26 27 1,3 78 1,3 78 Key CHMD’s b an k s ta te m en ts id en ti fy th e p ay ee o f so m e d ire ctde bi t 1 pa ym en ts to Key

as “ Leas in g S erv ic es DES”. Und er the ag reem en t wi thMarl in , un le ss CHMD ex erci se d i ts pu rch as e op ti on , itwas o bl ig edto m ai nt ai n the equi pm en t “ ingo odop erat in g o rd er” a ndto return the equi pm en t atth e en d o f th e le as e te rm “ ingo odwork in g c on di ti on ”, an d itwou ldbe li ab le to Marl infor an y da m ag e “be y on d o rd in ary wear an d t ear.” The ag reem en t al so requi redCHMD t o p ay an y an d a ll tax es du e o n the equi pm en t, t o in su re i t, an d t o b ear a ll rep ai r an d m ai nt en an ce co st s fo r it . In ad di ti on , th e ag reem en t ex pr es sl y

res erv edall tax be ne fit s as so ci at edwith the equi pm en t t o Mar li n u nl es s C HMD rec ei ve d, atth e o ut se t, an op ti on to pu rch as e th e equi pm en t atth e en d o f th e te rm

for$1 . The ag reem en t d idgra ntCHMD the op ti on to bu y at te rm -en d, b utfor$1 01 rathe r th an$1 . The Ma rli n a gr eem en t ex pr es sl y st at edth at itwas a“ TRUE LEASE” andno t a “ CONDITIONAL SALE”. The ag reem en t wi th Key

ob li ge d C HMD to purch as e th e equi pm en t atth e
en d o f th e le as e te rm

for $1 . Duri ng th e te rm , CHMD was requi redto pay an y an d al l t ax es du e o n the equi pm en t an d t o i ns ur e it . The Key ag reem en t furth er re ci te d th atth e p art ie s i nt en de d i t t o b e “ a true lea se or ati m e-s al e o f go od s (f or whi cha
cas h p ric e was off

eredto Less ee)”
.- 12 -

[* 12 ] CHMD’s certi fie d p ub li c acc ou nt an t, As hl ey Hall sm an , who as o f 20 07 ha d pr ep aredCHMD’s ta x re tu rn s fo r atlea stfiv e y ears , det erm in edwhi chequi pm en t it em s wo ul d b e d ep reci at edwitho utgu id an ce fr om or c on su lt at io n wi thDr. Hol de n. D. Offi ce Fi na nc es CHMD ea rn edin co m e fro m th e m ed ic al an d c os m et ol og y servi ces it pr ov id edto pa ti en ts , m an y of wh om were co ve redby heal th in su ran ce fr om whi ch CHMD wo ul d re cei ve po st ap po in tm en t p aym en t. As o f 20 07 CHMD rec ei ve d
m os t o f it s i nc om e fro m

on e in su ran ce p ro vi de r, Med ic are. Inor a ro un d Oct ob er 2 00 4 M ed ic are h adceas edm ak in g p aym en ts to Dr. Hol de n b ecau se of adi sp ut e. Dr. Hol de n andMed ic are u lt im at el y res ol ve d the di sp ut e, an d M ed ic are r el eas edfun ds owedto Dr. Hol de n i n Dec em be r 20 05 . In Apr il 20 06 Med ic are s us pe nd edpaym en ts to CHMD, res um in g o nl y aft er s ev eral
m on th s. Fo r atlea stso m e p orti on of 2 00 7 M ed ic are m ad e n o p aym en ts to CHMD. Dur in g thi s t im e, CHMD’s ex pe ns es rem ai ne d c on st an t, b utit s re cei pt s d ecl in edby
ro ug hl y ha lf. Afte r it s M ed ic are p aym en ts ha lt ed , CHMD st ru gg le d t o m eetit s ex pe ns es
an d p ayro ll an d s o s ou gh t t o b orro w fro m all av ai labl e so ur ces . At Dr. Hol de n’s di rect io n, M s. Garc iaob ta in edlo an s fo r CHMD fr om lo anco m pa ni es an d c red it- 13 -

[* 13 ] cardco m

pani es at i nt eres t ra te s up t o app ro xi m at el y 40 %. Mr. Rh on do in tro du cedMs . Garci a to Pet er Lee, a fi na nc ia l ex pe rt wh o s pe ci al iz edinfin di ng fin an ci ng fro m

bank s, m ortg ag e co m

pa ni es , andlea si ng co m

pa ni es , as wel l as hard
m on ey . Medware Gro up , Inc . (Medware) , whi chsp eci al iz edinm ed ic al so ftwa re, ha rdware, an d l eas in g, was am on g the co m pa ni es fro m

whi chCHMD o bt ai ne d fund s dur in g thi s p eri odof f in an ci al di ffi cu lty . As part o f he r m an ag em en t dut ie s, Ms . Garci a co m

pl et edap pl ic at io n p ap erwo rkfora lo anfro m Medware o n C HMD’s be ha lf. CHM D pro vi de d n o s erv ic es an d s ol d n o p ro du ct s t o M edware dur in g 20 07
. CHMD re cei ve d 1 6 p aym en ts to ta li ng $1 44 ,25 8 fr om Medware dur in g 2 00 7 (Me dware ad va nc es ):

Ch eckNo. Ch eckda te Am ount Dep os itda te Po stda te 15 09 1/ 12 /2 00 7 $9 ,90 0 1/ 12 /2 00 7 1/ 12 /2 00 7 15 10 1/ 12 /2 00 7 9,7 00 1/ 12 /2 00 7 1/ 12 /2 00 7 15 11 1/ 12 /2 00 7 9,8 00 1/ 12 /2 00 7 1/ 12 /2 00 7 15 12 1/ 12 /2 00 7 9,5 00 1/ 12 /2 00 7 1/ 12 /2 00 7 15 13 1/ 12 /2 00 7 9,9 00 1/ 12 /2 00 7 1/ 12 /2 00 7 15 14 1/ 12 /2 00 7 9,8 00 1/ 12 /2 00 7 1/ 12 /2 00 7 15 15 1/ 12 /2 00 7 9,7 00 1/ 16 /2 00 7 1/ 16 /2 00 7 15 16 1/ 12 /2 00 7 9,9 00 1/ 16 /2 00 7 1/ 16 /2 00 7- 14 -

[* 14 ] 15 17 1/ 12 /2 00 7 9,5 00 1/ 16 /2 00 7 1/ 16 /2 00 7

15 18 1/ 12 /2 00 7 6,5 58 1/ 16 /2 00 7 1/ 16 /2 00 7 16 70 5/ 18 /2 00 7 2,9 13 5/ 21 /2 00 7 5/ 21 /2 00 7 16 97 6/ 5/ 20 07 9,8 32 6/ 6/ 20 07 6/ 6/ 20 07 16 98 6/ 5/ 20 07 9,6 79 6/ 6/ 20 07 6/ 6/ 20 07 16 99 6/ 5/ 20 07 9,9 78 6/ 7/ 20 07 6/ 7/ 20 07 17 00 6/ 5/ 20 07 9,9 88 6/ 7/ 20 07 6/ 7/ 20 07 17 01 6/ 5/ 20 07 7,6 10 6/ 8/ 20 07 6/ 8/ 20 07 The pay ee o n e ach of t he se ch eck s was “ Ch ris to ph er Ho ld en ”. Medware re qu ire d
no co ll at eral , andCHMD m ad e n o p rin ci pa l o r in te res t p aym en ts to Medware. Medware wen t o utof b us in es s atso m e p oi ntaft er 2 00 7. 7

Acco rd in g t o the on li ne reco rd s o f th e Cal ifo rn iasec ret ary of st at e, 7 Medware Gro up , Inc ., was i nc or po rat edas aCal ifo rn iaco rp or at io n o n Au gu st25 , 20 05 , andat s om e p oi ntbe fo re the da te of t hi s o pi ni on , it s co rp or at e p owe rs were su sp en de d b y

th e Franc hi se Tax B oa rd , Cal ifo rn ia ’s in co m e ta x a ge nc y . W e ta ke jud ic ia l n ot ic e o f th es e ad jud ic at iv e fac ts pu rs ua ntto Fed . R. Evi d. 2 01 (b ). See Sear s v . Mag no li a Pl um

bi ng , Inc ., 77 8 F . Sup p. 2 d 8 0, 8 4 n .6 (D.D.C. 2 01 1) (ta ki ng jud ic ia l n ot ic e o f co rp or at e res ol ut io ns av ai labl e th ro ug h the Marylan d Dep artm en t o f Ass es sm en ts an d Tax at io n’s Web s it e); Gran t v . Auro ra Lo an Serv s., In c., 73 6 F . Sup p. 2 d 1 25 7, 1 26 5 (C .D. Cal. 2 01 0) (ta ki ng jud ic ia l n ot ic e of , in te r al ia , th e Del aware sec ret ary of st at e’s cert ifi cat e o f au th en ti cat io n fo r a cert ifi cat e o f in co rp or at io n anda cert ifi cat e o f co nv ers io n fr om a co rp or at io n t o an LLC); Len ge ric h v . Col um bi a Co ll ., 63 3 F . Sup p. 2 d 5 99 , 60 7 n .2 (N.D. Il l. 2 00 9) (ta ki ng jud ic ia l n ot ic e o f a co rp or at io n fi li ng forCo lu m bi a Co ll eg e Ch ic ag o o n the Ill in oi s s ecre tary

of s ta te ’s W eb si te ).- 15 -

[* 15 ] Ms . Garci a al so len t m on ey to CHMD o n s ev eral oc cas io ns . To faci li ta te Dr. Hol de n’s ac qu is it io n o f th e Ana he im off ic e, sh e le nthi m

$1 00 ,00 0, atlea st $5 0,0 00 of wh ic h was de li ve redinApri l 2 00 4. InDecem be r 20 04 sh e d el iv ered
an ot he r $2 0,0 00 . On Apr il 2, 2 00 7, M s. Garc ialen t CHM D $3 ,98 5 t o c ov er
m ed ic at io n andpra ct ic e ex pe ns es , andsh e le ntan ot he r $9 ,00 0 o n Ap ril 16 . Ms. Garci a d idno t ch arg e in te res t o n h er Ap ril 20 07 lo an s, wh ic h wer e rep ai d o ve r th e
co ur se of 2 00 7, b utsh e d idch arg e in te res t o n the lo an s s he m ad e in20 04
. CHMD p ai d i nt eres t t o v ari ou s l en de rs , cred itcardco m pa ni es , andlea si ng
co m pa ni es du rin g 2 00 7. Inso m e cas es , Ms . Garci a wro te ch eck s t o c ov er i nt eres t
on ly, with n o p aym en t t owardpri nc ip al
. CHMD cl os edit s An ah ei m off ic e inJu ly 200 7 b ecau se of i ts fin an ci al di ffi cu lt ie s. OnAug us t 2 7, 2 00 9, Dr. Ho ld enfil edforpe rs on al bankrupt cy . Mr. Rh on do ass is te d Dr. Ho ld eninpre pa rin g the pape rwo rkfor hi s b an krup tc y

fil in g. The cred it or s s ch edul e Dr. Hol de n fi le d wi th th e b an krup tc y co urt d oe s n otli st Medware am on g Dr. Ho ld en ’s cred it or s. E. Offi ce Fl oo ds Fro m 20 01 th ro ug h the ti m e o f tr ia l, CHM D ren te d i ts Oran ge off ic e fro m TCI Pro pe rti es , Inc . (TCI), a p ro pe rty m an ag em en t co m pa ny owne d b y

W il li am Grif fith, wh o a ls o o wns th e b ui ld in g i n wh ic h the Oran ge off ic e is lo cat ed . The- 16 -

[* 16 ] Oran ge off

ic e ex pe rie nc edwate r le ak s o n s ev eral oc cas io ns du rin g tha t t im e, in cl ud in g i n 2 00 7 and20 09
. On o r aro un d S ep te m

be r 29 , 20 07 , a pi pe burs t af te r he av y rai ns , cau si ng
se ve re d am ag e th atto oka y ear t o fu ll y rep ai r. CHMD h ire d Leo ne l M ig ue z, a
co ns tru ct io n c on tra ct or , to rep ai r da m ag eddrywall an d fl oo rin g. Mr . Mig ue z br ou gh t i n F ran ci sc o Al atris te , an e le ctric ian, t o p erfo rm ele ctric al workrel at edto th e rep ai rs . CHMD m ad e v ari ou s p aym en ts to ta li ng $7 ,18 0 t o o ne or t he othe r of th es e m eninDecem

be r 20 07 . TCI, th e la nd lo rd , als o e ng ag edco nt ract orB&B Gen eral Co ns tru ct io n S erv ic es , Inc . (B&B ), to pe rfo rm workat the pre m is es aft er th e 2 00 7 fl oo d. Two y ears lat er, o n o r aro un d Dec em be r 13 , 20 09 , hea vy rain s ag ai n c au se d a p ip e to bre ak

at t he Oran ge off

ic e o ve r a week en d. Un li ke th e 2 00 7 fl oo d, the 20 09 lea k a ffec te d the areaof t he Oran ge off ic e whe re m ed ic al reco rd s, co m pu te rs , bi ll in g re co rd s, re co rd s o f CHMD’s d eb ts , Dr. Hol de n’s b oo ks , andDr. Hol de n’s
an d M s. Garc ia ’s des ks were l oc at ed . Becau se , fol lo win g the cred it or s m eet in g, Dr. Hol de n’s b an krup tc y tru st ee h adask edto rev ie w fiv e y ears ’ worth of do cu m en ta ti on rel at edto CHMD’s b us in es s, M r. Rh on do ha d g athe redall of t he rel ev an t d oc um en ts an d h arddri ve s an d p la cedth em ina de si gn at edareaag ai ns t a wall of Dr. Ho ld en ’s off

ic e in or a ro un d Oct ob er o r Nov em be r 20 09 an d b efo re the- 17 -

[* 17 ] Decem

be r 20 09 flo od . In an un fo rtu na te twi stof f at e, th e p ip e b ro ke di rect ly ab ov e th es e rec or ds , dre nc hi ng an d thu s m os tl y de st ro y in g the m . CHMD’s reg ul ar cl ean in g c rew b ag ge d up the so dd enpape rwo rkan d c arri editou t o f th e b ui ld in g. Afte r bo th th e 2 00 7 and20 09 flo od s, CHM D fil edcla im s wi th it s p ro pe rty in su rer. Itrece iv ed$1 1,7 28 in20 07 an d $ 35 0 i n 2 00 9 u nd er i ts po li cy . CHMD in cl ud edth e $ 11 ,72 8 re cei ve d i n 2 00 7 a s i nc om e o n i ts Fo rm 11 20 S. II. Tax Returns an d Au di t Pet it io ne rs fil eda joi ntFo rm 10 40 , U.S. Ind iv idua l In co m e Tax Return, fo r th e 2 00 7 t ax ab le y ear. Th ey rep orte d i nc om e fro m

CHMD o n S ch edul es C an d E, bu t the parti es ha ve st ip ul at edth atpe ti ti on ers sh ou ldha ve rep orte d thi s i nc om e
on ly on S ch edul e E. On Sch edul e C the y rep orte d g ro ss in co m e o f $3 44 ,53 2 and to ta l ex pe ns es of $ 34 4,4 83 . On Sch edul e E th ey rep orte d a$2 9,4 79 ne t n onpa ss iv e lo ss fro m CHMD. CHMD fi le d F orm

11 20 S fo r th e 2 00 7 t ax ab le y ear. Itrep orte d $ 92 3,0 14 of to ta l i nc om e an d c la im ed$9 52 ,49 3 o f to ta l d educ ti on s, fo r a n etlo ss of $ 29 ,47 9. CHMD cl ai m edde du ct io ns for , in te r al ia , th e fo ll owi ng expe ns es :- 18 -

[* 18 ] Expe ns e Am ou nt

Sal ari es an d wag es $2 80 ,77 4 Ren ts 17 8,7 62 Int eres t 80 ,09 9 Depr eci at io n 41 ,12 2 Oth er d educ ti on s Sup pl ie s 12 2,1 44 Office 37 ,27 0 Dues an d s ub sc rip ti on s 11 ,97 3 Con tra ctlab or 24 ,74 4 Auto an d tru ck 10 ,54 1 Altho ug h C HMD’s Qui ckbo ok s fi le was m ai nt ai ne d o n the accrua l m etho d o f
acco un ti ng , itrep orte d i ts in co m e fo r ta x p ur po se s i n a cco rd an ce wi th th e cas h
m etho d o f acc ou nt in g. Res po nd en t as si gn edRev enue Agen t Be th Str ou d (RA Stro ud ) to ex am in e CHMD’s return. Inth e co ur se of h er ex am in at io n, RA St ro udne ve r ga in edacce ss to CHMD’s b oo ks an d re co rd s. Sh e co nduc te d abankde po si ts an al y si s o f CHMD’s Bo fA acco un t an d d et erm in edth at$1 ,31 6,8 27 ha d b eende po si te d i nt o th atacco un t dur in g 2 00 7. Fro m th is am ou nt , sh e d eb it ed$2 27 ,14 7 o f no nt ax ab le de po si ts . Res po nd en t al so de te rm in edth at$4 ,51 0 o f de po si ts in to Dr. Hol de n’s pe rs on al bankacco un t wer e ta xabl e in co m e o f CHMD. Fro m th es e num

be rs ,- 19 -

[* 19 ] res po nd en t co m

pu te d C HMD’s to ta l 2 00 7 i nc om e as $1 ,09 4,1 91 , or $1 71 ,17 7 m or e th anCHMD rep orte d o n i ts return. On M arch 28 , 20 11 , res po nd en t m ai le d p et it io ne rs a no ti ce o f de fic ie nc y for th e 2 00 7 t ax ab le y ear d et erm in in g ade fic ie nc y intax of $ 25 4,9 51 an d asec ti on 66 62 (a) a ccu racy-rela te d p en al ty of $5 0,9 90 . As is rel ev an t h ere, tha t de te rm in at io n re st edup ona po si ti ve ad jus tm en t o f $8 13 ,30 9 t o p et it io ne rs ’ rep orte d p as sthr ou gh lo ss fro m CHMD, m ad e o n the ba si s o f RA Stro ud ’s
ex am in at io n. Th atad

jus tm en t ar os e, in tu rn , fro m RA Str ou d’s i nc reas e o f CHMD’s g ro ss rece ip ts or s al es an d h er d is al lo wan ce o f ne arl y all of C HMD’s cl ai m edde du ct io ns forin te res t, d ep reci at io n, an d o th er b us in es s ex pe ns es . Pet it io ne rs ti m el y

pe ti ti on edth is Co urt fo r red et erm in at io n o f th e d efi ci en cy an d pe na lty onJu ne 23 , 20 11 . Thei r cas e was tri edon Decem be r 13 , 20 13
. OPINION The Co m m is si on er’s d et erm in at io n o f a t axpa y er’s t ax li ab il ity is ge ne ral ly pr es um edco rrec t, an d the tax pa y er b ears th e b ur de n o f pr ov in g the de te rm in at io n im pr op er. Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). Thi s ru le ge ne ral ly gov ern s the no np en al ty iss ue s i n thi s ca se .- 20 -

[* 20 ] I. Unr ep orte d In co m e Res po nd en t co nt en ds th atCHMD rec ei ve d b utfai le d t o re po rt i nc om e o f $1 71 ,17 7 fo r th e 2 00 7 t ax y ear. In the ir a ns weri ng bri ef p et it io ne rs co nc ed e th at 8 th ey fai le d t o re po rt $ 4,5 10 of d ep os it s i nt o Dr. Ho ld en ’s per so na l b an k a cco un t th atsh ou ldha ve be ende po si te d i nt o C HMD’s Bo fA acco un t, re du ci ng th e am ou nt atis su e to $1 66 ,66 7. Pet it io ne rs co nt en d tha t, o f th atam ou nt , $1 44 ,25 8 c on si st ed 9 of no nt ax ab le lo an s fr om

Medware an d $ 12 ,98 5 c on si st edof n on ta xabl e lo an s fr om Ms . Garci a. They m ak e n o arg um en t an d p res en te d n o e vi de nc e co nc ern in g the $9 ,42 4 b al an ce, s o we wi ll tre atth is am ou ntas c on ced ed . Thu s, the parti es di sp ut e whe th er CHM D recei ve d b utfai le d t o re po rt $ 15 7,2 43 of i nc om e fo r 20 07
. Bec au se of t he di ffi cu lty

in he ren t i n p ro vi ng a ne ga ti ve , wher e th e Co m m is si on er d et erm in es th ata ta xp ay er re cei ve d u nr ep orte d i nc om e, he “ m us t On b rie f res po nd en t co m

pu te s thi s amoun t as $1 82 ,90 5. Th is co m pu ta ti on 8 ig no res CHMD’s rep orti ng of $ 11 ,72 8 o f ot he r in co m e o n i ts Fo rm 11 20 S an d co nt rad ic ts parag rap hs 15 an d 2 4 o f th e p art ie s’ st ip ul at io n o f fac ts . W e wil l re ly on th e st ip ul at ednu m

be rs ab se ntob vi ou s co m

pu ta ti on erro rs . Als o i n the ir a ns weri ng bri ef p et it io ne rs co nt en d tha t the ir c on ced edrece ip t 9 of a $1 ,68 6 S ta te in co m e ta x re fundsh ou ldbe setoff ag ai ns t the am ou ntof un rep orte d i nc om e in di sp ut e. The n ot ic e o f de fic ie nc y , ho wev er, m ak es cle ar tha t res po nd en t d et erm in edth is $1 ,68 6 i nc reas e to pe ti ti on ers ’ in co m e se pa rat el y fro m hi s d et erm in at io n o f a $ 81 3,3 09 in crea se inth ei r in co m e at tri bu tabl e to hi s ad jus tm en t o f CHMD’s return. Th e St at e in co m e ta x re fundan d C HMD’s ne t in co m e are sep arat e is su es , andpe ti ti on ers ’ co nc es si on as t o the form er wi ll no t affe ctth e la tt er.- 21 -

[* 21 ] of fer s om e subs tant iv e ev id en ce s ho win g tha t the tax pa y er re cei ve d i nc om e fro m th e ch arg edact iv ity ” b efo re h e m ay rel y up on th e p res um

pt io n o f co rrec tn es s. W ei m ers ki rch v. Co m

mis si on er, 5 96 F.2d35 8, 3 60 (9t h C ir. 1 97 9) , rev ’g 67 T.C. 67 2 (1 97 7)
. If th e Co m m is si on er p ro vi de s a “ m in im al factua l fo un da ti on ” fo r hi s 1 0 de te rm in at io n, the bu rd enof p ro of sh ift s t o the tax pa y er. Pal m er v . Uni te d S ta te s, 11 6 F .3d13 09 , 13 12 (9t h C ir. 1 99 7) ; ac co rdPet zo ld t v . Comm is si on er, 9 2 T.C. 66 1, 6 89 (19 89 ). At th is sec on d s ta ge , th e ta xp ay er m us t en de av orto reb utth e pr es um pt io n i n fa vo r of

th e Co m m is si on er’s d et erm in at io n “by est ab li sh in g b y a pr ep on de ran ce o f th e ev id en ce tha t the de fic ie nc y de te rm in at io n i s arbi tra ry or
erro ne ou s.” R ap p v . Comm is si on er, 7 74 F.2d93 2, 9 35 (9t h C ir. 1 98 5)
. A. Res po nd en t’s Ev id en ti ary Fo un da ti on The Co m m is si on er m ay

em pl oy any reas on ab le m etho d t o re co ns tru cta ta xp ay er’s i nc om e an d the reb y lay the requi si te ev id en ti ary fo un da ti on . See Pet zo ld t v . Commis si on er, 9 2 T.C. at69 3; see als o P al m er, 1 16 F.3dat 1 31 2 (m etho d n eedon ly be “ rat io na ll y ba se d” ). Forex am

pl e, “ [t]he us e o f th e b an k

Thi s C ou rt “ fo ll ow[ s] a Co urt o f App eal s d eci si on whi chis squa rel y in 1 0 po in t wh ere app eal fro m

ou r de ci si on li es to th atCo urt o f App eal s an d t o tha t co urt al on e.” Gol se n v . Comm is si on er, 5 4 T.C. 7 42 , 75 7 (1 97 0) , aff’d, 4 45 F.2d 98 5 (1 0th C ir. 1 97 1) . Whe n the y fil edth ei r pe ti ti on , pet it io ne rs li ve d i n Cal ifo rn ia , a Sta te withi n the juri sd ic ti onof t he Co urt o f App eal s fo r th e Nin th Ci rcu it , so we wil l fo ll ow d eci si on s o f th atco urt. See sec . 74 82 (b )(1 )(A).- 22 -

[* 22 ] de po si t m etho d fo r co m pu ti ng un rep orte d i nc om e h as lo ng be ensan ct io ne d by the co urts .” Cla yto n v . Comm is si on er, 1 02 T.C. 63 2, 6 45 (19 94 ); s ee al so W ei m ers ki rch v. Co m

mis si on er, 5 96 F.2dat 3 62 (li st in g the tax pa y er’s b an k de po si ts as o ne m ean s b y whi chth e Co m

m is si on er co ul d h av e at te m pt edto
subs tant ia te th e ch arg e o f un rep orte d i nc om e). The m etho d “ as su m es th atall
m on ey de po si te d i n atax pa y er’s b an k a cco un t dur in g agi ve n p eri odco ns ti tu te s ta xabl e in co m e”. Cl ayto n v . Comm is si on er, 1 02 T.C. at 6 45 . Alth ou gh th e Co m m is si on er m

us t “ ta ke in to acco un t an y no nt ax ab le so ur ce o r de du ct ib le
ex pe ns e o f whi ch* * * [h e] has kn owl ed ge ”, “ [b ]ankde po si ts are p rima facie
ev id en ce o f in co m e”. Id . at 6 45 -6 46
. RA Stro udem

pl oyed the bankde po si ts m etho d t o re co ns tru ctCHMD’s 2 00 7 in co m e. Sh e co m

pu te d t ot al de po si ts in to th e Bo fA acco un t an d, t o the ex te ntof he r kn owl ed ge , eli m in at edall no nt ax ab le de po si ts . She fol lo wedth e p ro cedur e we
sa nc ti on edinCla yto n, an d p et it io ne rs do no t d is pu te he r co m pu ta ti on s. As pe ti ti on ers do no t co nt en d o th erwi se , we th eref or e co nc lu de th atres po nd en t h as
es tabl is he d am in im al ev id en ti ary fo un da ti on forhi s d et erm in at io n o f un rep orte d in co m e. See Weim ers ki rch v. Co m m is si on er, 5 96 F.2dat 3 61
.- 23 -

[* 23 ] B. Pet it io ne rs ’ Evi de nt iary Rip os te Pet it io ne rs off

eredev id en ce co nc ern in g two g ro up s o f al le ge dl y no nt ax ab le de po si ts : $ 14 4,2 58 rece iv edfro m Medware an d $ 12 ,98 5 re cei ve d fr om Ms
. Garci a. Res po nd en t h as no t d is pu te d tha t dur in g 2 00 7 C HMD un de rwen t s eri ou s fin an ci al di ffi cu lt ie s, tha t Dr. Ho ld enso ug htfin an ci ng fro m m ul ti pl e so ur ces to ke ep th e b us in es s af

lo at , or tha t CHM D recei ve d andde po si te d i nt o i ts Bo fA
acco un t $ 14 4,2 58 fro m

Medware. At i ss ue is whet he r th e Me dwa re ad va nc es rep res en t t ax ab le in co m e o r th e p ro ceed s o f a n on ta xabl e lo an . As fo r th e fu nd s fro m Ms . Garci a, res po nd en t i nt ro du cedth e ev id en ce o f th es e adva nc es bu t o n br ie f ob jects th atsupp orti ng fact s ar e n otinev id en ce. We anal yze the two set s o f al le ge d l oa ns sep arat el y .

1. Medware Fo r ta x p ur

po se s, a l oa n i s “ ‘an ag reem en t, ei th er ex pr es se d o r im pl ie d, whe reb y on e p ers onadva nc es m on ey to th e o th er an d the othe r ag rees to rep ay it up on su chterm s as to ti m e an d ra te of i nt eres t, o r witho utin te res t, as th e p art ie s
m ay ag ree.’” Co m

mis si on er v . Vall ey

Mo rri s Pl an , 30 5 F .2d61 0, 6 18 (9t h C ir. 19 62 ) (quo ti ng Nat’l Ba nkof P au ld in g v . Fid . & Cas . Co., 1 31 F. Sup p. 1 21 , 12 3- 12 4 (S .D. Ohio 19 54 )), rev ’g 33 T.C. 57 2 (1 95 9) , andrev ’g Mo rri s Pl anCo . of- 24 -

[* 24 ] Cal . v. Co m

m is si on er, 3 3 T.C. 7 20 (19 60 ). Whe th er anadva nc e co ns ti tu te s a lo anis a qu es ti on of f

act . Fis he r v. C omm is si on er, 5 4 T.C. 9 05 , 90 9 (1 97 0)
. Inde te rm in in g wh ethe r a p aym en t co ns ti tu te s a l oan, “ we ex am in e th e tra ns act io n a s a wh ol e.” Welchv. Co m m is si on er, 2 04 F.3d12 28 , 12 30 (9t h C ir. 20 00 ), aff’g T.C. Me m o. 1 99 8- 12 1, 7 5 T.C.M . (CCH) 2 06 5 (1 99 8)
. The co nv en ti on al tes t i s t o a skwhet he r, whe n the fun ds were adva nc ed , th e p art ie s ac tu al ly int en de d re pa y m en t. * * * Howev er, co urts ha ve co ns id ereda nu m be r of othe r fac to rs as rel ev an t i n a ss es si ng whet he r a tran sa ct io n i s a tru e lo an , su chas: (1) whe th er the pro m is e to rep ay is ev id en cedby a no te or o th er in st ru m en t; (2) whet he r in te res t was ch arg ed ; (3 ) whe th er a fi xe d sc he du le forrep aym en ts was e st ab li sh ed ; (4 ) whe th er co ll at eral was gi ve n t o s ecure p aym en t; (5) whet he r rep aym en ts were m ad e; (6) whe th er the bo rro wer h ada reas on ab le pro sp ectof r ep ay in g the lo an * * *; an d (7 ) whe th er the parti es co nduc te d the m se lv es as i f th e tra ns act io n wer e a l oa n.” * * * [I d.]

“No o ne fact oris ne ces sa ril y de te rm in at iv e, an d the fact or s co ns id ereddo no t
co ns ti tu te anex cl us iv e li st .” Cal lo way v. Co m m is si on er, 1 35 T.C. 26 , 37 (20 10 ), aff’d, 6 91 F.3d13 15 (11 th Cir . 20 12 ). W e m ay qu ic kl y di sp os e o f th ree o f th es e fac to rs . The rec or d c on ta in s n o
ev id en ce tha t: (1) CHMD an d M edware ev er ex ecu te d any writt enin st ru m en t
em bo dyin g alo anag reem en t; (2) Medware i m po se d an i nt eres t ch arg e, de ferr edor ot he rwis e, on it s ad va nc es to CHMD; or ( 3) CHMD an d M edware es tabl is he d any- 25 -

[* 25 ] fix edrep aym en t s ch edul e. W e rec og ni ze tha t l oa n d oc um en ts be twee n CHMD an d M edware, i f th ey ex is te d, m ay

ha ve be ende stro y edinth e 2 00 7 o r th e 20 09 flo odat t he Oran ge off ic e. But a l os s o f or ig in al reco rd s due to ci rcu m st an ces be y on d atax pa y er’s co nt ro l m erel y en ti tl es th e ta xp ay er t o e st ab li sh fact s wi th othe r cre di bl e ev id en ce; itdo es no t s hi ft t he bu rd enor p ro of , whi ch
rem ai ns with the tax pa y er. See Mal in ows ki v. Co m m is si on er, 7 1 T.C. 1 12 0, 1 12 4- 11 25 (19 79 ). Pet it io ne rs fai le d t o c arry tha t b ur de n wi th res pe ctto th es e th ree fact or s, s o the y

weig h a ga in stfin di ng a lo an . Altho ug h the reco rddo es co nt ai n e vi de nc e rel ev an t t o the ne xttwo fact or s,
ne ithe r wei gh s i n p et it io ne rs ’ fav or : (4 ) Med ware re qu ire d n o c ol la te ral , and(5) CHMD n ev er m ad e an y

pri nc ip al , in te res t, o r othe r pa y m en ts to Medware. Co nt in ui ng with the si xt h fa ct or , when Medware ad va nc edfun ds to CHMD, CHMD was indi re fi na nc ia l s tra it s, b utit s s itua ti on was n otho pe le ss . Medware
wro te 10 ch eck s t o C HMD to ta li ng $9 4,2 58 on Jan ua ry 12 , 20 07 . At th atti m e, pa ym en ts fro m

CHMD’s p rin ci pa l s ou rce o f in co m e, Med ic are, h adbe enfro zenfor
se ve ral m on th s. Yet , Med ic are h adon ce b efo re s to pp edpaym en ts an d the n
res um edth em . Mor eo ve r, Dr. Hol de n’s b an krup tc y sch edul e rev eal s tha t Ch as e is su edhi m

a cred itcardinJan uary

20 07 , evi de nc e th atanarm ’s-le ng th len de r di d
no t co ns id er h im

who ll y un cred itworth y

at t ha t t im e. CHMD rec ei ve d a dd it io na l- 26 -

[* 26 ] fun ds fro m

Medware i n M ay

an d J un e 2 00 7. Itis un cl ear f ro m th e rec or d whe th er the se fun ds were d is bu rs edpu rs ua ntto th e sam e lo anarrang em en t as th e fund s d is bu rs edinJan ua ry . Neverth el es s, s oo n a fte r rec ei vi ng th em , inJu ly 200 7, CHMD cl os edit s An ah ei m off ic e. Giv enth atth e Oran ge off ic e h adbe en pr of it ab le , clo su re o f th e Ana he im off ic e en ha nc edth e p ro sp ectof atu rn aro un d. Furth er b ol st eri ng th is pro sp ect , Med ic are h adres um edit s p aym en ts to CHMD i n th e fi rs t h al f of

20 07 . W e co nc lu de th atth e si xt h fa ct orweig hs sl ig ht ly in favo r of fin di ng a lo an . The sev en th fact or , th e p art ie s’ con du ctwith re sp ectto th e advanc es , is
am bi gu ou s. Onon e h an d, M edware, the purp orte d l en de r, requi redCHMD t o
co m pl et e a l oa n app li cat io n, a f orm al ity co ns is te ntwith c omm erci al len di ng pr act ic es . On th e o th er h an d, M edware d is burs edanirr eg ul ar am ou ntof f un ds in irr eg ul ar tran ch es at i rreg ul ar i nt erv al s, wh ic h was no t co ns is te ntwith c on ve nt io na l le nd in g p ract ic es . Odd ly, of th e 1 6 M edware ch eck s t ot al in g $ 14 4,2 58 th atCHMD de po si te d dur in g 2 00 7, n on e h ada face va lu e g reat er tha n $ 10 ,00 0, an d s ev eral ha d face va lu es jus t b el ow tha t am ou nt . As fo r CHMD, Ms . Garci a te st ifi edge ne ral ly th atsh e en te redlo an s o n C HMD’s bo ok s as lo an s an d tha t s he ha d e nt eredth e Medware ad va nc es on CHMD’s g en eral led ge r. The ad va nc es do no t ap pe ar i n the in co m e se ct io n o f CHMD’s P& L, bu t p et it io ne rs di d n otin tro du ce i ts ge ne ral- 27 -

[* 27 ] led ge r orba lanc e sh eet . W e th us can no t v eri fy whet he r, an d i f so , ho w, CHMD re co rd edth e adva nc es fro m Medware o n i ts bo ok s. We do kn ow, h owe ve r, th atDr. Hol de n d idno t l is t M edware as a cred it orinhi s b an kr up tc y sch edul es fil ed in20 09
. Insu m , fiv e fac to rs weig h a ga in stfin di ng a lo an , on e wei gh s i n fa vo r, an d
on e is am bi gu ou s. Th es e fac to rs are s im pl y an al yti cal aid s, n otess en ti al ele m en ts . See Welc h v . Comm is si on er, 2 04 F.3dat 1 23 0. Th e u lt im at e que st io n, wh ic h i s a factua l o ne , is whet he r th e p art ie s i nt en de d alo anwhenth e fu nd s wer e adva nc ed
. 1 1 See i d. To p rev ai l o n thi s i ss ue , pet it io ne rs ne ed edto est ab li sh by a prep on de ran ce of th e ev id en ce tha t s uc h was th e p art ie s’ in te nt . Whi le di sp ut edfactis su es as t o whi chparti es ha ve pro du cedcred ib le ev id en ce ar e rar el y so clo se th atbu rd enof pr oo f m atte rs , we are n otco nv in ced . Medware d idrequi re a l oa n app li cat io n, an d W e typi cal ly addres s thi s que st io n i n c as es inwhi chth e Co m m is si on er h as 1 1 pr op os edanalt ern at iv e ch arac te riz at io n fo r th e al le ge d l oa n. Se e, e.g ., Call owa y v. Co m m is si on er, 1 35 T.C. 26 , 27 (20 10 ) (s to cksal e p ro ceed s) , aff’d, 6 91 F.3d 13 15 (11 th Cir . 20 12 ); Ka id er v . Comm is si on er, T.C. Mem o. 2 01 1- 17 4, s li p o p. at 13 -1 4 (s erv ic es co m

pe ns at io n) ; Teym ou rian v . Comm is si on er, T.C. Mem o. 2 00 5- 23 2, 9 0 T.C.M . (CCH) 3 52 , 35 2 (2 00 5) (co ns tru ct iv e d iv id en ds ). Res po nd en t h as pr of fere d n o a lt ern at iv e ch arac te riz at io n h ere, p erh ap s b ecau se th e rec or d s ug ge st s no pl au si bl e al te rn at iv e ex pl an at io n fo r th e Me dwa re ad va nc es . For i ns tanc e, pe ti ti on ers off

eredtes ti m on y , andwe ha ve fou ndas afact , th atCHMD p ro vi de d no servi ces an d s ol d n o p ro du ct s t o M edware dur in g 2 00 7. Dr. Ho ld enex pl ai ne d th athe ha d n ev er m etan y on e atMedware, wh ic h t en ds to rul e o uta gi ft.- 28 -

[* 28 ] pe ti ti on ers ’ witne ss es tes ti fie d u ne qu iv oc al ly tha t the Medware ad va nc es were l oa ns . Butne ithe r Ms . Garci a n orDr. Hol de n n orMr. Rh on do co ul d re cal l
an y term s o f th e al le ge d l oa n. Fu rth er, the m an ne r in whi chth e fu nd s wer e adva nc edan d the ut te r ab se nc e o f ev id en ce tha t M edware ev er ex pe ct edor s ou gh t rep aym en t s tro ng ly sug ge stth atno ge nu in e lo anwas i nt en de d. Al th ou gh we m ay
no t kno w th e rea so n fo r th e Me dwa re ad va nc es , “ th e p au ci ty of reco rd s * * *
m ak es itim

po ss ib le to sep arat e th e p os si bl e whe atfro m th e d efi ni te ch aff i n the tra ns fers of f

un ds ” atis su e h ere. Se e Welchv. Co m m is si on er, 7 5 T.C.M . (CCH) at 20 68 -2 06 9 (t ak in g i nt o a cco un t “ co nf us io n, co nt rad ic ti on s, an d o th er an om al ie s” in th e fac ts , in cl ud in g the “un us ua l b us in es s h ab it s” of t he pu rp orte d l en de r, in
co nc lu di ng th atth e ta xp ay er h adno t es tabl is he d tha t d is pu te d a dv an ces were lo an s)
. Pet it io ne rs ha ve fai le d t o e st ab li sh th atth e Me dwa re ad va nc es were
no nt ax ab le lo an s, an d we wi ll su st ai n re sp on de nt ’s det erm in at io n tha t the se adva nc es were t ax ab le in co m e to CHMD.

2. Ms . Garci a On cr os s- ex am in at io n M s. Garc iates ti fie d tha t CHM D hadpa idhe r in te res t
on a lo andu rin g 2 00 7. Re sp on de ntth enin tro du cedin to ev id en ce a d ecl arat io n da te d Dec em

be r 22 , 20 12 , andsi gn edby Ms. Garci a und er p en al ty of pe rjury, in- 29 -

[* 29 ] whi chsh e d es cri be s m ak in g l oa ns to CHMD i n Ap ril an d Dec em be r 20 04
an d i n Ap ril 20 07 . Ms. Gar ci a d ecl aredth atsh e h adlen t $ 3,9 85 on Apri l 2 an d $9 ,00 0 o n Ap ril 16 , 20 07
. Res po nd en t co nc ed es th atMs . Garci a m ad e th es e lo an s b utob jects th at pe ti ti on ers ha ve no t s ho wn tha t the len t fu nd s wer e d ep os it edin to th e Bo fA
acco un t. With res pe ctto th e Apr il 2 l oa n, al th ou ghwe fo un d M s. Garc ia ’s te st im on y cred ib le an d b el ie ve th atsh e m ad e th e lo an , we canfin d n o e vi de nc e th at th e fu nd s wer e ev er d ep os it edin to CHMD’s b an k a cco un t. Co ns eque nt ly, th e
am ountof t he Apri l 2 lo ancan no t b e ap pl ie d t o re du ce the am ountof u nr ep orte d de po si ts tre at edas i nc om e inres po nd en t’s b an k d ep os it s an al y si s. With res pe ctto th e Apr il 16 lo an , ho wev er, CHM D’ s b an k s ta te m en t re fle ct s a $ 9,0 00 de po si t fr om

“ Am eri canExp res s DES” o n tha t d ay . Ms. Gar ci a’s de cl arat io n d oe s n otrev eal th e
m ean s b y whi chsh e m ad e th e Apr il 16 lo an , bu t i t i s p laus ib le th atsh e tr an sf erre d $9 ,00 0 t o C HMD fro m

anAm eri canExp res s cr ed itcard . In an y ev en t, we fi ndth e
ex actco in ci de nc e b etweenth e am ou nt s o f th e Apr il 16 de po si t an d l oan p ers ua si ve whe n c oupl edwith M s. Garc ia ’s tes ti m on y . Peti ti on ers ha ve est ab li sh edth at CHMD re cei ve d andde po si te d a$9 ,00 0 n on ta xabl e lo anfro m Ms . Garci a o n Ap ril 16 , 20 07
.- 30 -

[* 30 ] Insu m , we con cl ud e th atCHMD’s to ta l i nc om e fo r 20 07 was $ 1,0 85 ,19 0,
co m pu te d a s fo ll ows : So ur ce Am ou nt Tot al de po si ts in to Bo fA acco un t $1 ,31 6,8 27 Non ta xabl e d ep os it s co nc ed edby res po nd en t (22 7,1 47 ) Non ta xabl e d ep os itof Ap ril 16 , 20 07 , lo anfro m

Ms . Garci a (9 ,00 0) Tax ab le de po si ts in to Dr. Hol de n’s per so na l ac co un t 4,5 10

__ __ __ __ _ Tota l i nc om e o f CHMD 1,0 85 ,19 0 Co ns eque nt ly, CHMD re cei ve d b utfai le d t o re po rt $ 16 2,1 76 of i nc om e fo r 20 07
. II. Dis al lo wedDedu ct io ns Deduc ti on s ar e a m at te r of leg is la ti ve gra ce, an d t axpa y ers be ar the bu rd enof pr ov in g the ir e nt it le m en t t o any clai m edde du ct io n. Ru le 14 2( a); INDOPCO, In c. v. Co m m is si on er, 5 03 U.S. 79 , 84 (19 92 ). A tax pay er m us t i de nt ify eachde du ct io n
av ai labl e, sh ow tha t h e o r sh e h as m etall requi rem en ts th eref or , andke ep bo ok s o r
reco rd s tha t s ub st an ti at e th e expe ns es un de rlyin g the de du ct io n. Se c. 60 01 ; Ro be rts v. Co m

m is si on er, 6 2 T.C. 8 34 , 83 6 (1 97 4) . If a ta xp ay er’s rec or ds are l os t
orde st ro y edbe cau se of c irc um st an ces be y on d h is co nt ro l, the tax pa y er m ay in st ead- 31 -

[* 31 ] subs tant iate th e ex pe ns es with o th er cr ed ib le ev id en ce. See Mal in ows ki v. Co m m is si on er, 7 1 T.C. at11 24 -1 12 5. Und er Co ha n v . Comm is si on er, 3 9 F .2d54 0, 5 43 -5 44 (2dCir . 19 30 ), if a ta xp ay er cl ai m s a d educ ti onbu t ca nn otful ly sub st an ti at e th e ex pe ns e und erl y in g th e d educ ti on , th e Co urt m ay ge ne ral ly app ro xi m at e th e al lo wab le am ou nt , bea rin g he av il y ag ai ns t the tax pa y er wh os e in ex act itud e is of h is ownm ak in g. Th e Co urt
m us t h av e so m e b as is up onwhi chto m ak e it s es ti m at e, ho wev er, o r el se th e al lo wan ce wo ul d a m ountto “un gu id edlar ge ss e”. Will ia m s v . Uni te d S tate s, 2 45 F.2 d 5 59 , 56 0 (5 th Cir . 19 57 ); Vani cekv. Co m m is si on er, 8 5 T.C. 7 31 , 74 2- 74 3 (1 98 5)
. A. Bu si ne ss Exp en se s Sect io n 1 62 (a) p erm it s a t ax pa y er t o d educ t al l o f th e o rd in ary an d n eces sa ry
ex pe ns es pa idor i nc urreddu rin g the tax ab le y ear i n c arrying on th e ta xp ay er’s tra de or b us in es s. “ To qua li fy as an a ll owabl e d educ ti on un de r [s ect io n] * * * 16 2( a) * * * anit em

m us t (1 ) be ‘ pa idor i nc urreddurin g the tax ab le y ear,’ (2) be fo r ‘carry in g o n any trad e o r bu si ne ss ,’ (3) be an‘ ex pe ns e,’ (4) b e a ‘nece ss ary’
ex pe ns e, an d (5 ) be an‘ or di na ry ’ ex pe ns e.” Co m m is si on er v . Lin co lnSav . & Loan Ass ’n, 40 3 U.S. 3 45 , 35 2 (1 97 1) . An ex pe ns e sa ti sf ie s the sec on d e le m en t o nl y if i t is “ di rect ly con ne ct edwith o r pe rta in in g t o the tax pa y er’s trad e o r bu si ne ss ”. Sec.- 32 -

[* 32 ] 1.1 62 -1 (a), In co m e Tax Reg s. Anex pe ns e qua li fie s as ne ces sa ry if i t i s

“ ap pr op ria te an d h el pf

ul ” to th e ta xp ay er’s b us in es s, Welch v. Hel ve rin g, 2 90 U.S. at11 3, an d a s o rd in ary if t he un de rlyin g tran sa ct io n i s a “ co m m on or f reque nt
oc cu rren ce i n the type o f bu si ne ss in vo lv ed ”, se e Dep ut y v. du P on t, 3 08 U.S. 48 8, 49 5 (1 94 0) . A tax pa y er m us t es tabl is h the se ess en ti al ele m en ts with c red ib le
ev id en ce. See sec . 1.6 00 1- 1( a), In co m e Tax Reg s. Whi le bu si ne ss expe ns es are g en eral ly deduc ti bl e, pe rs on al , li vi ng , and fam il y ex pe ns es are ty

pi cal ly non de du ct ib le . See s ec. 2 62 (a). A bu si ne ss ex pe ns e cl ai m edas ade du ct io n m us t b e in cu rredpri m ari ly for b us in es s ra th er tha n p ers on al
reas on s. See W al li se r v. C ommis si on er, 7 2 T.C. 4 33 , 43 7 (1 97 9) . Whe re an
ex pe ns e ex hi bi ts bo th pe rs on al an d b us in es s ch arac te ris ti cs , th e “ te st [] requ ire s a weig hi ng an d b al an ci ng of a ll th e fac ts * * * b eari ng inm in d the pre ced en ce o f
se ct io n 2 62 , whi chde ni es de du ct io ns forpe rs on al ex pe ns es , ov er s ect io n 1 62 , whi chall ows de du ct io ns forbu si ne ss ex pe ns es .” Sh aro n v . Comm is si on er, 6 6 T.C. 51 5, 5 24 (19 76 ) (ci ti ng co st s o f co m m ut in g andord in ary cl ot hi ng as e xa m pl es of
ex pe ns es he lp fu l an d n eces sa ry to anin di vi du al ’s em

pl oym en t tha t ar e “ es se nt ia ll y pe rs on al ” an d h en ce n on de du ct ib le ), aff’d p er cu riam , 59 1 F .2d12 73 (9t h C ir. 19 78 ).- 33 -

[* 33 ] W e ap pl y

th e fo reg oi ng rul es to each cat eg ory of d is pu te d b us in es s ex pe ns es intu rn . 1. Sal ari es an d Wage s Of CHMD’s cl ai m ed$2 80 ,77 4 s al ari es an d wag es de du ct io n, $ 11 1,1 38
rem ai ns indi sp ut e (d is pu te d s al ari es ). The d is pu te d s al ari es ex cl ud e wag es CHMD pa idto em

pl oyees fo r whi chitpre pa redFo rm s W-2, Wage an d Tax Sta te m en t, an d al so rem un erat io n p ai d t o M s. Garc iath atsh e rep orte d o n h er 2 00 7 F orm 10 40
. CHMD p rep aredno Fo rm s W-2 an d fi le d n o F orm s 1 09 9- MIS C, Mi sc el lane ou s In co m e, with re sp ectto an y po rti on of the di sp ut edsal ari es . Peti ti on ers cla im th at CHMD p ai d $ 76 ,79 4 o f sa larie s an d wag es to fiv e in di vi du al s t o wh om itdi d n ot is su e ei th er Fo rm s W-2 o r Fo rm s 1 09 9- MIS C. Sect io n 1 62 (a)( 1) auth or iz es a de du ct io n fo r “ sa larie s o r ot he r co m pe ns at io n fo r pe rs on al servi ces actua ll y ren de red ”. To b e d educ ti bl e, co m pe ns at io n m

us t b e
reas on ab le an d “pu rel y

forservi ces .” Sec. 1 .16 2- 7( a), In co m e Tax Reg s.; acco rd Nor -Cal Adju st ers v. Co m m is si on er, 5 03 F.2d35 9, 3 62 (9t h C ir. 1 97 4) , aff’g T.C. Mem o. 1 97 1- 20 0.- 34 -

[* 34 ] Pet it io ne rs pro du cedco pi es of c an cel edch eck s, al l ca sh eddu rin g 2 00 7,
es tabl is hi ng to ta l p aym en ts of $ 74 ,99 4, co ns is ti ng of $ 28 ,00 0 p ai d t o Dr. M an n, 1 2 $4 ,00 0 p ai d t o Dr. An du

jar, $8 ,75 5 p ai d t o M s. Do , and$3 4,2 39 pa idto Ms
. Nian gn ou an sy (sal ary ch eck s) . Ms. Gar ci a id en ti fie d Drs . Man n andAndujaras ph y si ci an s wh o s aw pa ti en ts at C HMD’s Anahe im off ic e, Ms . Do as a nu rs e pr act it io ne r who work edat t he Anah ei m off ic e, an d M s. Ni an gn ou an sy as anoff ic e
m an ag er atth e Ana he im

off ic e. Sh e fu rth er re co gn iz edth e sa lary ch eck s as payro ll ch eck s p rep aredby A DP. Ms . Garci a ex pl ai ne d tha t the sal ary ch eck s 1 3 rep res en te d p aym en t fo r se rv ic es as e m pl oyees o r in de pe nd en t co nt ract or s.

Pet it io ne rs ’ Exh ib it18 -P cl ai m s t o s ub st an ti at e $ 76 ,79 4, b utitdo ub le
1 2 co un te d c he ck

No. 5 57 , payabl e to Ms . Nian gn ou an sy, in the am ou ntof $ 1,4 40 , whi chap pe ars twi ce wi th inth e ex hi bi t. Pet it io ne rs als o i nc lu de d c he ck No. 5 28 , pa y ab le to Jen ni fer M . Riv era, i n the am ou ntof $ 36 0. Al th ou gh th e ch eckwas n ot cas he d u nt il Aug us t 3 0, 2 00 7, i t was is su edon Decem be r 29 , 20 06 . For acas h m etho d t axpa y er s uc h a s C HMD, whe re a ch eckis is su edinon e ta x year bu t pr es en te d andho no redina subs eque nttax y ear, “ [f]or Fe de ral tax pu rp os es , th e subs eque ntpay

m en t o f th e ch eckrel at es ba ckto th e d at e o f de li ve ry ”. See Webe r v. Co m m is si on er, 7 0 T.C. 5 2, 5 7 (1 97 8) . Hence , th e ch eckto Ms . Riv era was de du ct ib le on ly for 2 00 6, i ts tax y ear o f is su e, no t fo r 20 07
. CHMD’s P& L in cl ud es a “ Sal ari es & W ag es ” acc ou nt , anda few ch eck s 1 3 pa y ab le to Drs. Ma nn an d An du jar an d M s. Do are l is te d the re. Mo stof t he Sal ari es & W ag es acco un t en tri es on th e P&L d o n otin cl ud e sp eci fic ch eck nu m be rs an d p ay ees , bu t fr om th ei r no tati on s an d p eri od ic ity , we con cl ud e th at th es e en tri es refl ectag gr eg at edpayro ll ex pe ns es as c om pu te d b y ADP. The d at es on th e can cel edch eck s p et it io ne rs pro du cedco rres po ndto th e d at es on whi ch CHMD ac cru edth es e p ayro ll ex pe ns es .- 35 -

[* 35 ] Res po nd en t co nt en ds th atth e fo reg oi ng ev id en ce d oe s n otad equa te ly
subs tant ia te an y

po rti on of t he di sp ut edsal ari es be cau se : (1 ) pe ti ti on ers pro vi de d
no writ te n e vi de nc e o f th e se rv ic es pro vi de d, n on e o f th e n am edin di vi du al s te st ifi ed , andMs . Garci a d idno t p ro vi de en ou gh de ta il inhe r te st im on y co nc ern in g th e sp eci fic servi ces ren de redby the se fiv e in di vi du al s; (2) CHMD d idno t i ss ue Fo rm s W-2 o r Fo rm s 1 09 9- MIS C to an y of t he na m edin di vi du al s; an d (3 ) al th ou gh Ms . Garci a te st ifi edth atDrs. Ma nn an d An du jar ha d the ir o wn p ro fes si on al
co rp or at io ns , th e sa lary

ch eck s wer e m ad e p ay ab le to an d e nd or se d b y th em pe rs on al ly. Beg in ni ng with re sp on de nt ’s firs t co nt en ti on , Ms . Garci a cre di bl y tes ti fie d t o th e ro le s Drs . Man n andAndujar , Ms . Do, Ms . Nian gn ou an sy, andMs . Riv era pl ay edinCHMD’s p ract ic e. Sh e n ot ed , forex am pl e, th atDr. Man n “pr ov id ed fam il y m ed ic in e se rv ic es to our pa ti en ts inth e Ana he im off ic e.” Res po nd en t de m an ds gre at er d et ai l ab ou t the se “ se rv ic es ”, bu t fo r m os t an y on e who ha s ev er vi si te d ado ct or ’s off

ic e, m ed ic al servi ces are p riv il eg edan d p riv at e. Mo reo ve r, fam il y m ed ic in e is hard ly a m

y st eri ou s an d e so te ric subs pe ci al ty dem an di ng furth er el uc id at io n. Re sp on de ntpo in ts to no au th or ity , andwe kn ow o f no ne , th atrequi res th e se rv ic e p ro vi de r’s owntes ti m on y or p art ic ul ar fo rm s o f writ te n d oc um en ta ti on fo r subs tant ia ti on of c om pe ns at io n e xp en se s. Ms . Garci a’s sp eci fic ,- 36 -

[* 36 ] un co nt ro ve rte d t es ti m on y an d the can cel edch eck s cl earl y su ffi ce. If
res po nd en t d es ire d the do ct or s’ tes ti m on y , he was free to subp oe naeit he r orbo th of th em (m uc h e as ie r fo r res po nd en t tha n fo r pe ti ti on ers , bec au se of t he rul es reg ard in g p aym en t o f tr av el an d fe e ex pe ns es ) an d t o c al l the m . Tha t CHM D fai le d t o i ss ue Fo rm s W-2 o r 10 99 -MI SC t o the se fiv e in di vi du al s d oe s n otm eanth atitdi d n otpay th em forservi ces . Alth ou ghth e ab se nc e o f ta x fo rm s co ul d i nd ic at e th atth e p aym en ts were fo r pu rp os es othe r th an
se rv ic es co m

pe ns at io n, M s. Garc iaid en ti fie d the sal ary ch eck s as payro ll ch eck s pr ep aredby A DP. Con si st en t wi th th attes ti m on y , th e sa lary ch eck s wer e pe rio di cal ly iss ue d, an d the othe r can cel edch eck s i n the reco rdha ve fou r-d ig it
nu m be rs wher eas th e sa lary

ch eck s h av e th ree- di gi t num be rs . Ms. Gar ci a te st ifi ed th at , alo ng with h an dl in g C HMD’s pa yro ll , ADP pro du cedan d i ss ue d F orm s W-2
on CHMD’s b eh al f. ThatADP is su edpayro ll ch eck s t o the se fiv e in di vi du al s b ut
m ay no t h av e is su edth em

Fo rm s W-2 o r 10 99 -MI SC d oe s n otest ab li sh th atth e pa yro ll ch eck s wer e in factpaym en ts forso m ethi ng els e; rathe r, th es e fac ts in di cat e th atADP eit he r erre d o r was erro ne ou sl y advi se d tha t CHM D wou ldis su e Fo rm s 10 99 -MI SC. CHMD m ay no t h av e is su edor c au se d t o b e is su edby A DP- 37 -

[* 37 ] th es e fo rm s, as th e Co de wou ldhave ob li ge d i t t o d o. Sect io n 6 72 1( a) 1 4 pr es cri be s a m on et ary pe na lty forne gl ect in g tha t o bl ig at io n, n otdi sa ll owa nc e o f a de du ct io n fo r th e p aym en t tha t s ho ul d h av e b eenrep orte d. Inan y ev en t, we n eed
no t s pe cu la te ab ou t wh y

tax form s wer e ap pa ren tl y no t i ss ue d b ecau se is su an ce o f
su chform s i s n ota pr erequi si te to th e d educ ti on of s al ari es an d wag es . Res po nd en t’s thi rdan d fi na l co nt en ti on si m il arl y m is se s the m ark . ThatDrs. Man n andAndujarha d the ir o wn co rp or at io ns do es no t m eanth atth ey alwa y s
worke d e xc lu si ve ly for the ir c or po rat io ns or r ecei ve d p aym en ts forth ei r se rv ic es in th ei r co rp or at e n am es . Ind eed , res po nd en t al le ge s tha t ce rta inch eck s m ad e o utto Dr. Hol de n andde po si te d i nt o h is pe rs on al acco un t s ho ul d h av e b eenpay ab le to CHMD. Add it io na ll y , th e p art ie s s ti pu la te d tha t Dr. Ho ld enwas e rro ne ou sl y is su edFo rm s 1 09 9- MIS C und er h is pe rs on al So ci al Secu rit y nu m be r rathe r th an CHMD’s em

pl oyer id en ti fic at io n n um be r. Pla in ly, itis no t i m

po ss ib le or e ve n a ll th atun us ua l fo r a p hysic ian wi th a pr of es si on al co rp or at io n t o re cei ve paym en ts for
se rv ic es ren de redinhi s o r he r own na m e.
Sec. 6 04 1 andth e reg ul at io ns th ereu nd er re qu ire ev ery pe rs on en ga ge d i n 1 4 a tr ad e o r bu si ne ss to pre pa re an d fi le Fo rm 10 96 , Annua l Su m

m ary an d Tran sm it ta l o f U.S. Inf

orm at io n R eturns , or Fo rm 10 99 -MI SC fo r eac h p ers on to who m itpay s, i n the co ur se of i ts tra de or b us in es s, s erv ic es co m pe ns at io n o f at le as t $ 60 0 dur in g the tax ab le y ear, u nl es s i t i ss ue s tha t p ers on a Fo rm W -2 . Secs
. 1.6 04 1- 1( a)(1 )(i )(A), (2 ), 1.6 04 1- 3( a), In co m e Tax Reg s.- 38 -

[* 38 ] Ms . Garci a cre di bl y tes ti fie d, af

te r rev ie win g the sal ary ch eck s, tha t the
sa lary ch eck s al l re pr es en te d c om pe ns at io n fo r se rv ic es . Con si de rin g the ir pe rio di ci ty andth e n atur e o f th e se rv ic es be in g c om pe ns at ed , th e p aym en ts are
reas on ab le inam ou nt . Peti ti on ers ha ve ad equa te ly sub st an ti at ed$7 4,9 94 of
or di na ry an d n eces sa ry

ex pe ns es forsal ari es an d wag es of C HMD’s st aff, an d we he reb y red et erm in e res po nd en t’s d et erm in at io n t o tha t ex te nt . As fo r th e $ 36 ,14 4 ba lanc e o f th e d is pu te d s al ari es , with re sp ectto whi chpe ti ti on ers have off eredno
ev id en ce o r arg um en t ex cep t fo r fau lty ev id en ce re la ti ng to $1 ,80 0 o f th atam ou nt , we wil l s us ta inres po nd en t’s d et erm in at io n.

2. Equ ip m en t Re nt al Of CHMD’s cl ai m ed$1 78 ,76 2 re nt al ex pe ns e d educ ti on , $8 0,3 00 rem ai ns in di sp ut e. Pet it io ne rs att rib ut e th is am ou nten ti rel y to equi pm en t re nt al ex pe ns es . Ms . Garci a an d Dr. Ho ld enbo th tes ti fie d tha t CHM D ren te d n um ero us it em s of equi pm en t u se d i n the op erat io n o f Dr. Hol de n’s m ed ic al pra ct ic e. Thes e it em s
ran ge d fr om

sp eci al iz edm ed ic al equi pm en t, s uc h a s the Therm ag e m ach in e, to
m un da ne off

ic e equi pm en t, s uc h a s co py m ach in es . Ms. Gar ci a id en ti fie d LFG, MBF Leas in g, HPS C, IFC C red itCo rp ., GreatAm eri ca, Banc of Am eri ca Leas in g, Co m pa re Bu si ne ss Sy st em s, In c., Pro te ct io n On e, an d GE (co ll ect iv el y , lea si ng
co m pa ni es ) as co m

pani es fro m

whi chCHMD h adlea se d e qu ip m en t u se d i n i ts- 39 -

[* 39 ] bu si ne ss du rin g 2 00 7. Pe ti ti on ers off eredbankst at em en ts an d c an cel ed ch eck s d oc um en ti ng pay

m en ts CHMD m ad e dur in g 2 00 7 t o e ach of t he lea si ng
co m pa ni es . In co m

parin g C HMD’s ba nkst at em en ts ag ai ns t i ts P&L, we ha ve id en ti fie d a dd it io na l p aym en ts CHMD m ad e to th e le as in g c om pa ni es du rin g 20 07
. Ms . Garci a co ul d n otreca ll whi chsp eci fic equi pm en t CHM D ren te d fr om

1 5 each lea si ng co m

pany, w ith the ex cep ti onof P ro te ct io n On e, fro m whi chCHMD le as edDVR sec ur ity

cam eras an d re co rd ers forbo th off ic es . Ann ot at io ns on th e P&L i nd ic at e th atCHMD ren te d, i nt er al ia , it s co py m ach in es fro m Ban c o f Am eri ca Leas in g, i ts Therm ag e m ach in e, omni li gh t, an d h y pe rb ari c ch am

be r fro m GE, secu rit y

equi pm en t fr om

Pro te ct io n On e, an d t el ep ho ne -rel at edit em s fr om GreatAm eri ca. Into ta l, the reco rdco nt ai ns ev id en ce o f pa y m en ts to th e le as in g
co m pa ni es to ta li ng $7 7,8 58
.

Inso m e in st an ces , a ba nkst at em en t o r can cel edch eckest ab li sh es th ata 1 5 pa ym en t was m ad e to HPSC, b utth e P&L l is ts th e p ay ee as GE. Becau se th e do ll ar am ou nt s an d d at es co rrel at e wit h o ne an ot he r, we co ns id er thi s d is crep an cy un im po rta nt . Also , innu m ero us in st an ces , th e to ta l p aym en t am ou ntin cl ud ed ta xe s, fi nanc e ch arg es , in suran ce ch arg es , and/o r ch arg es for ass oc iate d s erv ic es , al l o f whi chMs . Garci a tr ack edinsep arat e cat eg or ie s o f th e P&L. Bec au se CHMD cl ai m edanequi pm en t re nt al ex pe ns e d educ ti on equa l t o the to ta l ex pe ns es reco rd edinth e equi pm en t re nt al cat eg ory on it s P& L, we hav e o m it te d t ax es , fin an ce ch arg es , andothe r an ci ll ary it em s i n c om pu ti ng to ta l s ub st an ti at ed equi pm en t re nt al ex pe ns es .- 40 -

[* 40 ] Res po nd en t d eem s the for eg oi ng ev id en ce i ns uf fic ie ntbe cau se (1) Ms
. Garci a was un ab le to sp eci fic al ly ide nt ify whic h i te m s C HMD ren te d fr om each le as in g c om

pa ny; (2 ) pe ti ti on ers pro du cedno lea se ag reem en ts with any of th e le as in g c om

pa ni es ; (3 ) th e P&L l is ts no equi pm en t re nt al ex pe ns es forMarl inor Key ; (4 ) CHMD m ad e n o l eas e p aym en ts to eit he r Mar li n o r Key du rin g the 20 07 ta x year; and(5) ne ithe r Ms . Garci a n orDr. Hol de n s pe ci fic al ly m en ti on edMarl in
orKey
. W ith re sp ectto res po nd en t’s fi rs t two co nt en ti on s, the Co urt fi nd s i t
un rem ark ab le th atMs . Garci a was un ab le to ass oc ia te eachsp eci fic lea se d i te m with i ts res pe ct iv e le ss or , si x years a fte r th e ta x year atis su e an d fo ur y ears aft er sh e cea se d wo rk in g fo r CHMD. Sh e an d Dr. Ho ld enad equa te ly ide nt ifi edth e le as edequi pm en t, an d M s. Garc iaad equa te ly ide nt ifi edth e le ss or s. To th e ex te nt th atev id en ce l in ki ng each paym en t t o the sp eci fic equi pm en t t o wh ic h i t ap pl ie d i s
ne ces sa ry , CHMD’s P&L p ro vi de s i t. Furth erm or e, pe ti ti on ers cred ib ly exp la in ed 1 6 why the y co ul d n otpro du ce wri tt enco nt ract s b etweenCHMD an d e ach of the le as in g c om

pa ni es : Ma ny of CHMD’s re co rd s, an d i n p art ic ul ar tho se Dr. Hol de n’s cr ed it or s s ch edul e fi le d wi th th e b an krup tc y co urt l ik ewis e 1 6 li nk s m an y

of t he lea si ng co m

pa ni es with the sp eci fic equi pm en t l eas edfro m th em . For e xa m

pl e, th e sc he du le refl ect s tha t CHM D lea se d two l as er m ach in es , a ne ur om etrix m ach in e, a h y pe rb ari c ch am

be r, an d asau nafro m

GE andcred itcard m ach in es fro m

MBF Lea si ng .- 41 -

[* 41 ] rel at in g t o c red it or s s uc h a s the lea si ng co m pa ni es , were d es tro y edinan
un fo rtu na te (an d dren ch in g) tu rnof f at e in 20 09 . Betwe enMs . Garci a’s te st im on y
an d the am

pl e d oc um en tary

ev id en ce, we thi nkpe ti ti on ers ha ve am pl y
reco ns tru ct edth is ev id en ce. See Mal in ows ki v. Co m m is si on er, 7 1 T.C. at11 24
- 11 25
. W e n eedno t ad dr es s re sp on de nt ’s las t thr ee co nt en ti on s b ecau se , as de sc rib edin fra p artII.C, we co nc lu de th atth e p ur po rte d l eas es with M arl inan d Key were i n fa ctco nd it io na l s al es co nt ract s, s o p aym en ts CHMD m ad e to Marl in
an d Key m

us t b e an al yzedacco rd in gl y . Pet it io ne rs ha ve est ab li sh edth atCHMD p ai d $ 77 ,85 8 o f equi pm en t re nt al
ex pe ns es du rin g 2 00 7. Th e it em s re nt ed , ran gi ng fro m sp eci al iz edm ed ic al equi pm en t t o ty

pi cal off ic e equi pm en t, were di rect ly con ne ct edwith and ap pr op ria te an d h el pf

ul to CHMD’s o pe rat io n o f two m ed ic al off ic es th atals o pr ov id edco sm et ol og y

servi ces . It i s co m

m on , if n otcu st om ary, fora pr of es si on al of fic e to lea se rathe r th anpurch as e sp eci al iz edequi pm en t, co py m ach in es , and
co m pu te r syste m s; an d the sh eer n um be r of lea si ng co m

pani es fro m

whi chCHMD
ren te d e qu ip m en t d em on strat es th e ex is te nc e o f a ro bu stm ark etforsu chservi ces . The equi pm en t re nt al ex pe ns es were the refo re o rd in ary as well as n eces sary . W e ho ldth atpe ti ti on ers ha ve est ab li sh edwith c red ib le ev id en ce al l es se nt ia l el em en ts- 42 -

[* 42 ] un de r se ct io n 1 62 (a), s ee Co m m is si on er v . Lin co lnSav . & Loan Ass ’n, 40 3 U.S. at 3 52 ; s ec. 1 .60 01 -1 (a), In co m e Tax Reg s., an d the Co urt wi ll red et erm in e
res po nd en t’s d is al lo wan ce o f CHMD’s equi pm en t re nt al de du ct io ns to th e ex te ntof
anad di ti on al $7 7,8 58 de du ct io n.

3. Supp li es Of CHMD’s cl ai m ed$1 22 ,14 4 s up pl ie s ex pe ns e d educ ti on , $1 1,6 13 rem ai ns indi sp ut e. Thi s amoun t re pr es en ts th e su m of t hr ee ex pe ns es th atres po nd en t
co nt en ds CHMD was no t en ti tl edto de du ct :

Date Qui ckbo ok s

subc at eg ory Payee Am ou nt Ja n. 2 2, 2 00 7 Ph arm aceu ti cal s Am eri canExp res s $1 ,84 8 Ja n. 2 2, 2 00 7 Med ic al Am eri canExp res s 8,6 41 Mar . 9, 2 00 7 Ph arm aceu ti cal s Am eri canExp res s 1,1 24 The se ex pe ns e it em s ap pe ar i n C HMD’s P&L. The P&L in di cat es th atch eckNos
. 22 55 , 85 55 , and85 65 were u se d t o m ak e th e p aym en ts , bu t o f th es e o nl y on e is sh own inth e b an k s ta te m en ts as h av in g c le ared . Thatch eck , No. 2 25 5, was us ed fo r th e March 9 p aym en t, wh ic h c le aredCHMD’s acc ou nton Marc h 1 2, 2 00 7. Bu t th e am ou ntof t hi s ch eckis on ly $50 0, n ot$1 ,12 4. Th ere i s n o i de nt ifi ab le
ev id en ce tha t the othe r two ch eck s, No s. 8 55 5 and85 65 , eve r cl eare d the bank
. Oth erwi se , pet it io ne rs off eredno tes ti m on y

or d oc um en tary

ev id en ce t o- 43 -

[* 43 ] subs tant iate th atth es e ex pe ns es were ac tu al ly inc urredan d p ai d o r to ex pl ai n th e d is crep an ci es , andno ev id en ce o f th e al le ge d e xp en di tu res ’ pu rp os es . There is in su ffi ci en t ev id en ce h ere t o warran t ap pl ic at io n o f th e Co ha n ru le . See Van ic ekv. Co m m is si on er, 8 5 T.C. at74 3. We will co ns eque nt ly sus ta inres po nd en t’s di sa ll owa nc e o f $1 1,6 13 of C HMD’s cl ai m edsupp li es ex pe ns e d educ ti on .

4. Offi ce Of CHMD’s cl ai m ed$3 7,2 70 off ic e ex pe ns e d educ ti on , $3 6,2 58 rem ai ns in di sp ut e. Thi s amoun t re pr es en ts th e su m of t wo ex pe ns es th atres po nd en t co nt en ds CHMD was no t en ti tl edto de du ct :

Date Qui ckbo ok s

subc at eg ory Payee Am ou nt Jan . 5, 2 00 7 Offi ce ex pe ns e Pl at in um Plu s $1 2,6 49 Feb . 18 , 20 07 Offi ce ex pe ns e Ban k o f Am eri ca Vi sa 23 ,61 0 The se ex pe ns e it em s ap pe ar i n C HMD’s P&L. Pet it io ne rs in tro du cedno ev id en ce-
-o th er tha n the no tati on inth e P&L tha t ch eckNo. 8 54 3 was us edto m ak e th e pa ym en t-- to est ab li shth atth e Ja nu ary 5 e xp en se was a ctua ll y in cu rredan d p ai d, o r if s o, fo r wha t p ur

po se . There is no ev id en ce i n the bankst at em en ts th atth is ch eck
ev er cl eare d. CHM D’ s b an k s ta te m en t re fle ct s tha t ch eckNo. 2 20 7, wh ic h the P&L i nd ic at es was u se d t o m ak e th e Feb ru ary 18 paym en t, cl eare d C HMD’s
acco un t o n F eb ru ary 26 , 20 07 . Cur io us ly, th e am ountof t ha t ch eckas c as he d was- 44 -

[* 44 ] on ly $1,0 00 , no t $ 23 ,61 0, s ug ge st in g tha t CHM D m ay ha ve accrue d the ful l
am ountof acred itcardst at em en t b utm ad e o nl y a $1 ,00 0 p aym en t. Inan y ev en t, pe ti ti on ers ha ve no t es tabl is he d tha t the rem ai ni ng $2 2,6 10 of e xp en se s was infact in cu rredan d p ai d n orpro vi de d e vi de nc e o f a b us in es s re as on forany am ou ntof t he Feb ru ary 18 ex pe ns e. W e wil l s us ta inres po nd en t’s d is al lo wan ce o f $3 6,2 58 of CHMD’s o ffi ce ex pe ns e d educ ti on .

5. Due s an d S ub sc rip ti on s Of CHMD’s cl ai m ed$1 1,9 73 du es an d s ub sc rip ti on s ex pe ns e d educ ti on , $6 ,40 1 re m ai ns indi sp ut e. Thi s amoun t re pr es en ts th e su m of f iv e ex pe ns es th at
res po nd en t co nt en ds CHMD was no t en ti tl edto de du ct(di sp ut eddu es ): Date Payee Am ou nt Mar. 29 , 20 07 Adv an ta $7 50 Mar. 29 , 20 07 Adv an ta 1,1 00 Sept . 28 , 20 07 Adv an ta 2,0 00 Oct. 29 , 20 07 Adv an ta 55 1 Oct. 29 , 20 07 Adv an ta 2,0 00- 45 -

[* 45 ] CHMD’s P&L l is ts ch eck s n um be rs forth es e fi ve it em s, an d c an cel edch eck s
as well as i ts bankst at em en ts refl ectth atth es e ch eck s d idcle ar CHM D’ s ac co un t. Howev er, the ev id en ce s ug ge st s tha t CHM D accru edth e fu ll am ou nt s o f ex pe ns es ch arg edto th e Adv an tacardas r efl ect edonit s m on th ly stat em en ts bu t m ad e o nl y pa rti al paym en ts to wardth e b al an ce o wed . Che ck No. 2 29 7, wh ic h the P&L
as so ci at es with the two Marc h 2 9 e xp en se s t ot al in g $ 1,8 50 , hada face am ou ntof
on ly $30 0. Si m il arl y , che ck No. 9 11 7, wh ic h the P&L li nk s t o the $2 ,00 0 Sep te m be r 28 ex pe ns e, ha d aface am ou ntof o nl y $5 00 . Andch eckNo. 2 50 4, whi chth e P&L as so ci at es with the two Octo be r 29 ex pe ns es to ta li ng $2 ,55 1, h ada face am ou ntof o nl y

$5 40 . Becau se CHMD co m pu te d i ts in co m e fo r ta x p ur po se s
on th e cas h m etho d, i t was en ti tl edto de du cton ly exp en se s ac tu al ly pai d. Se e se c. 1.4 46 -1 (c)( 1) (i) , Inc om e Tax Reg s. Nev erthe le ss , by ch arg in g e xp en se s t o the Adv an tacard , CHMD actua ll y pa idth os e ex pe ns es us in g fu nd s b orro wedfro m Adv an taan d s o wo ul d b e en ti tl edto de du ctth em inful l. See Gran anv. Co m m is si on er, 5 5 T.C. 7 53 , 75 5 (1 97 1)
. Rel y in g o n Gra na n, re sp on de ntob jects th at , eve n i f th e d is pu te d due s wer e de du ct ib le ex pe ns es , th ey wou ldha ve be ende du ct ib le when ch arg edto th e Adv an tacard , no t wh enpaym en ts were m ad e to wardth e b al an ce o wedon th e Adv an tacard . In Gran an , th e ta xp ay er h adbo rro wedfun ds to pay m ed ic al- 46 -

[* 46 ] ex pe ns es an d the n c la im edde du ct io ns forth os e ex pe ns es when , ina
subs eque nttax y ear, h e m ad e p aym en ts on th e lo an . Id. Ap pl y in g “ th e g en eral rul e * * * tha t wh ena de du ct ib le paym en t i s m ad e wit h b orro wedm on ey , th e d educ ti on is no t p os tp on edun ti l the y ears inwhi chth e b orro wedm on ey is rep ai d” , we hel d th atth e ta xp ay er was no t en ti tl edto th e cl ai m edde du ct io ns inth e subs eque nty ear. Id . at 7 55 -7 56 . CHMD accrue d e xp en se s fo r an d m ad e p aym en ts to wardAdv an ta cardbi ll s dur in g 2 00 7, b utsi m il arl y to th e ta xp ay er i n Gra na n, i t cl ai m ed de du ct io ns for20 07 forth e p aym en ts to Adv an tarathe r th anforth e und erl y in g
ex pe ns es . Theref

or e, res po nd en t co nt en ds , th ey m us t es tabl is h tha t the un de rlyin g
ex pe ns es were ac tu al ly pai d i n (a ndhe nc e d educ ti bl e fo r) the tax y ear a t i ss ue . Altho ug h the reco rddo es no t d is cl os e p reci se ly whe n C HMD in curredth e
un de rlyin g o bl ig at io ns or wh enitch arg edth os e o bl ig at io ns to th e Adv an tacard , th e d at es on whi chCHMD acc ru edth e p aym en ts to Adv an taest ab li sh ge ne ral ti m efra m es . It i s p laus ib le th atth e ex pe ns es un de rlyin g the Adv an tach arg es
accrue d o n M arch 29 , 20 07 , were i nc urredan d p ai d i n 2 00 6. With res pe ctto th e Sep te m be r 28 an d Oct ob er 2 9, 2 00 7, ch arg es --ac cru edjus t b efo re o r du rin g the fo urth qu art er o f 20 07 --the un de rlyin g e xp en se s wer e m or e li ke ly than n ot- 47 -

[* 47 ] in cu rredan d p ai d i n the 20 07 tax y ear. Th eref or e, to th e ex te ntth os e
ex pe ns es were o rd in ary an d n eces sa ry , pet it io ne rs wou ldbe en ti tl edto de du ct th em . The ev id en ce i n the reco rdin di cat es th os e und erl y in g e xp en se s s at is fie d the requi rem en ts of s ect io n 1 62 (a). Ms . Garci a co nf irmed th atth e Adv an tach eck s were fo r du es an d s ub sc rip ti on s. Th e P&L co rro bo rat es Ms . Garci a’s as se rti on . The P&L “ m em o” en try for the Sep te m be r 28 ex pe ns e an d o ne of t he Octo be r 29
ex pe ns es is “ Am es pa ”. Altho ug h i t m ay no w be d efu nc t, fo r th e y ear a t i ss ue th e Am eri canMed ic al Edu cat io n & Serv ic es Ph y si ci anAss oc ia ti on(AMESPA) was a
m em be rs hi p o rg an iz at io n tha t p ur po rte d t o p ro vi de co nt inui ng educ at io n t o ph y si ci an s. We fin d tha t p aym en ts to su chanorg an iz at io n qua li fy as o rd in ary an d
ne ces sa ry bu si ne ss expe ns es of C HMD’s m ed ic al an d c os m et ol og y off ic es . The
m em o e nt ry

forth e se co ndOcto be r 29 ex pe ns e is “ DEA Regi st ra”. Fe de ral law requi res ph y si ci an s wh o d is pe ns e co nt ro ll edsubs tanc es to reg is te r an nu al ly w ith th e Dru g En fo rcem en t Adm in is tra ti on (DEA), 21 U.S.C. sec . 82 2( a)(1 ), (b ) (2 00 6) ; 21 C.F.R. s ec. 1 30 1.1 1 (2 00 9) , andwe co nc lu de th atth e se co ndOcto be r 29
ex pe ns e se rv edth is purp os e. Henc e, th e expe ns es un de rlyin g the Sep te m be r 28
an d Oct ob er 2 9 d is pu te d due s wer e o rd in ary an d n eces sa ry bu si ne ss ex pe ns es de du ct ib le un de r se ct io n 1 62 (a).- 48 -

[* 48 ] W e fi ndth atCHMD was en ti tl edto de du ct$4 ,55 1 o f th e d is pu te d due s; ot he rwis e, we su st ai n re sp on de nt ’s det erm in at io n c on cern in g the m .

6. Co nt ractLabo r Of CHMD’s cl ai m ed$2 4,7 44 de du ct io n fo r co nt ractlab orex pe ns e, $9 ,97 0
rem ai ns indi sp ut e. Thi s amoun t re pr es en ts th e su m of f iv e ex pe ns es th at
res po nd en t co nt en ds CHMD was no t en ti tl edto de du ct :

Date Payee Am ou nt Dec. 17 , 20 07 Leo ne l M ig ue z $2 ,78 0 Dec. 21 , 20 07 Fran ci sc o Al atris te 1,5 00 Dec. 24 , 20 07 Leo ne l M ig ue z 1,4 00 Dec. 24 , 20 07 Leo ne l M ig ue z 1,5 00 Dec. 31 , 20 07 Fran ci sc o Al atris te 2,7 90 Dr. Hol de n re la te d- -an d a“ Los s Li st ” und er CHM D’ s i ns ur an ce p ol ic y
supp orts hi m --tha t o n o r aro un d S ep te m be r 29 , 20 07 , a pi pe inth e Oran ge off ic e bu rs t af te r he av y rai ns , cau si ng sev ere d am ag e th atto oka y ear t o fu ll y rep ai r. Ms
. Garci a an d Dr. Ho ld entes ti fie d tha t CHM D hi redLeon el Mi gu ez, a co ns tru ct io n
co nt ract or , to rep ai r da m ag eddrywall an d fl oo rin g andto rem od el part o f th e of fic e, an d tha t M r. Mi gu ez b ro ug htinFran ci sc o Al atris te , an e le ctric ian, t o pe rfo rm ele ctric al workrel at edto th e rep ai rs . Peti ti on ers als o i nt ro du cedfou r
can cel edch eck s d at edfor an d c as he d dur in g Dec em be r 20 07 th atest ab li sh- 49 -

[* 49 ] pa y m en ts to ta li ng $5 ,68 0 t o M r. Mi gu ez an d $ 1,5 00 to Mr. Ala tri st e. W ith
res pe ctto th es e fo urpay

m en ts , pet it io ne rs ha ve est ab li sh edactua l p aym en t an d of fere d c red ib le ev id en ce o f th e se rv ic es rem un erat edan d the bu si ne ss reas on for th em . Altho ug h p et it io ne rs di d n otin tro du ce a c an cel edch eckto subs tant ia te th e cl ai m ed$2 ,79 0 p aym en t t o M r. Alatris te on Decem be r 31 , 20 07 , refl ect edin CHMD’s P& L, th e P&L l in ks th atpaym en t t o c he ckNo. 2 70 5. Th atch eckdi d n ot cl ear C HMD’s acco un t dur in g 2 00 7, an d the re i s n o e vi de nc e itcle aredina late r y ear. Be cau se CHMD rep orte d i ts in co m e fo r ta x p ur po se s o n acas h b as is , itwas
no t en ti tl edto de du ctex pe ns es forMr. Ala tri st e’s se rv ic es un ti l i t h adactua ll y pa id th os e ex pe ns es . See s ec. 1 .44 6- 1( c)(1 )(i ), In co m e Tax Reg s. CHM D m ay ha ve de li ve reda $2 ,79 0 c he ckto Mr. Ala tri st e in 20 07 , bu t a c he ckis m erel y a
co nd it io na l p aym en t an d re li ev es anob li go r of hi s l iabi li ty onl y

if andwhen itis pr es en te d andho no red . See Weber v . Comm is si on er, 7 0 T.C. 5 2, 5 7 (1 97 8) ; Heri ta ge Org., LLC v . Comm is si on er, T.C. Mem o. 2 01 1- 24 6, s li p o p. at13 . “ Fo r Fed eral tax pu rp os es , th e subs eque ntpaym en t o f th e ch eckrel at es ba ckto th e d at e of de li ve ry so as t o a ll ow d educ ti on s ev enwher e ch eck s ar e p res en te d andho no red du rin g l at er y ears .” W eb er v . Commis si on er, 7 0 T.C. at57 . Abs en t ev id en ce tha t a ch eckwas p res en te d andho no red , ho wev er, a ca sh ba si s t axpa y er m ay no t d educ t- 50 -

[* 50 ] th e und erl y in g e xp en se . See i d. Th atrul e ap pl ie s s qu arel y to CHMD’s Decem be r 31 paym en t t o M r. Alat ris te an d p recl ud es it s d educ ti on . Res po nd en t d eem s p et it io ne rs ’ ev id en ti ary sh owi ng in su ffi ci en t ac ro ss th e bo ardbe cau se : (1 ) ne ithe r Mr. M ig ue z n orMr. Ala tri st e te st ifi edat t ria l, an d pe ti ti on ers pro vi de d n o wri tt enqu ot es , in vo ic es , recei pt s, co nt ract s, o r ot he r do cu m en ts rel at in g t o the ir a ll eg edservi ces an d (2 ) pe ti ti on ers ha ve no t ex pl ai ne d why, gi ve n tha t TCI h ire d B &B t o p erfo rm reco ns tru ct io n wo rk , CHMD, a te na nt , wou ldne edto hi re an d p ay it s o wn co ns tru ct io n c rew. W ith re sp ectto res po nd en t’s fi rs t o bjec ti on , tes ti m on y fro m Mes sr s. M ig ue z
an d Al atris te m ig htha ve en ha nc edpe ti ti on ers ’ ev id en ti ary sh owi ng , bu t i t was far fro m ne ces sa ry . Tog ethe r with the tes ti m on y an d d oc um en tary

ev id en ce o f th e 20 07 flo od , Ms . Garci a’s an d Dr. Ho ld en ’s tes ti m on y co nc ern in g the servi ces th es e
m enpro vi de d a de qu at el y est ab li sh edth e n atur e o f th os e se rv ic es . Furt he r, be cau se th e 2 00 9 fl oo d d es tro y edm any of C HMD’s or ig in al reco rd s, p et it io ne rs were
en ti tl edto subs tant ia te th es e ex pe ns es with c red ib le ev id en ce o th er tha n o rig in al
rece ip ts . See Ma li no wsk i v . Comm is si on er, 7 1 T.C. at11 24 -1 12 5. As fo r res po nd en t’s s eco ndob jecti on , TCI di d h ire B&B t o p erfo rm rep ai r
work a fte r th e 2 00 7 fl oo d, b utwe se e n o re as on why th is factwou ldcas t d oubton whe th er CHM D’ s p aym en ts to Mes sr s. M ig ue z an d Al atris te were o rd in ary an d- 51 -

[* 51 ] ne ces sa ry

bu si ne ss ex pe ns es . CHMD’s lea se forth e Oran ge off ic e is no t i n th e rec or d. Dr. Ho ld entes ti fie d tha t u ti li ti es were n otin cl ud edinth e le as e, bu t we ot he rwis e kno w no ne of i ts term s. Inparti cu lar, we do no t kno w ho w th e le as e al lo cat edfin an ci al res po ns ib il ity forrep ai rs an d m ai nt en an ce o f th e le as eh ol d im pr ov em en ts at Orang e o ffi ce, an d wh ethe r th ere wer e co m m on area s o r st ru ctur al
co m po ne nt s tha t B& B m ig hthave rep ai red . In s ho rt, we h av e n o fa ctua l b as is for pr es um in g, as res po nd en t wo ul d h av e u s d o, tha t TCI s ho ul d h av e b orne , anddi d be ar, al l re pa ir c os ts ass oc ia te d wi th th e 2 00 7 fl oo d. Re sp on de nt , to o, i s fr ee t o c al l witne ss es on ce p et it io ne rs ha ve m etth ei r bu rd enof g oi ng forwardwith c red ib le
ev id en ce o n the di sp ut edfactua l m at te r. Insu m , res po nd en t’s o bjec ti on s p res um e a g reat er ev id en ti ary bu rd enth an th atactua ll y

requi redun de r se ct io n 1 62 (a). Pet it io ne rs ha ve subs tant ia te d $ 7,1 80 of ord in ary an d n eces sa ry

co nt ractlab orex pe ns es . W e wil l re ject a ndred et erm in e
res po nd en t’s d et erm in at io n t o tha t ex te nt .

7. Aut o andTruc k The en ti re am ou ntof C HMD’s cl ai m ed$1 0,5 41 au to an d tru ckex pe ns e de du ct io n re m ai ns at i ss ue . Alth ou gh th e fam il iar ru le s o f se ct io n 1 62 (a) s ti ll ap pl y , th e ex pe ns es un de rlyin g thi s d educ ti onare s ub ject t o ru le s o f subs tant ia ti on th atsupe rs ed e th e Co ha n d oc tri ne . San fo rdv. Co m m is si on er, 5 0 T.C. 8 23 , 82 7-- 52 -

[* 52 ] 82 8 (1 96 8) , aff’d p er curia m , 41 2 F .2d20 1 (2 d C ir. 1 96 9) ; s ec. 1 .27 4- 5T, Tem po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 4 (No v. 6 , 19 85 ). Spe ci fic al ly,
se ct io n 2 74 (d ) pr ov id es th atno de du ct io n s ha ll be all owe d fo r, am on g o th er thi ng s,
ex pe ns es with re sp ectto li st edpro pe rty (as d efi ne d i n s ect io n 2 80 F(d )(4 ) an d in cl ud in g p as se ng er au to m ob il es ) “un le ss th e ta xp ay er s ub st an ti at es by adequa te
reco rd s o r by su ffi ci en t ev id en ce co rro bo rat in g the tax pay er’s o wn s ta te m en t” cert ai n s pe ci fic ele m en ts . For e xp en se s wi th res pe ctto a pa ss en ge r au to m ob il e, th os e el em en ts are: (1) “ [t]he am ou ntof e ach sep arat e ex pe nd itur e”, (2 ) th e
am ount(in ti m e o r m il eag e) o f eac h b us in es s u se , (3) th e d at e o f eac h e xp en di tu re
orus e, an d (4 ) th e b us in es s p ur po se of e ach ex pe nd itur e o r us e. Sec. 1 .27 4- 5T(b )(6 ), Tem

po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 6 (No v. 6 , 19 85 ). If th e ta xp ay er ca nn otpro du ce re co rd s ad equa te to sat is fy sec ti on 27 4( d) be cau se th os e
reco rd s wer e lo stth ro ug h c irc um st an ces be y on d h is co nt ro l, “ su chas d es tru ct io n by * * * flo od ,” th e ta xp ay er m ay subs tant ia te anex pe ns e “by reaso nabl e
reco ns tru ct io n o f hi s ex pe nd itur e o r us e.” Id . par a. (c)( 5) , 50 Fed . Reg . 46 02 2. Pet it io ne rs ’ Exh ib it24 -P, whi chco ns is ts of n um ero us can cel edch eck s an d
an no tate d b an k andcred itcardst at em en ts , est ab li sh es th e am ount s an d d at es of t he
au to an d tru ckex pe ns es forwhi chCHMD cl ai m edde du ct io ns . Many of t he- 53 -

[* 53 ] ch eck s wer e p ay ab le to Ms . Garci a. Sh e te st ifi edth atth es e p aym en ts rep res en te d a“ car a ll owa nc e” p ai d t o h er as anin de pe nd en t co nt ract orbe cau se sh e of te n dro ve ba ckan d fo rth be twee n the Oran ge an d An ah ei m off ic es an d a ls o t o ot he r lo cat io ns forpro

jects ne ces sa ry

forth e b us in es s. Ms . Garci a st at edth athe r
m on th ly car paym en t was $6 46 , andpe ti ti on ers ’ do cu m en tary ev id en ce re fle ct s tha t CHMD p ai d tha t am ou ntto Ms . Garci a m on th ly thro ug ho ut20 07 . Becau se th es e
am ount s re pr es en t p artof M s. Garc ia ’s in de pe nd en t co nt ract or co m pe ns at io n, the y
co ns ti tu te servi ces co m

pe ns at io n ra th er tha n aut o andtru ckex pe ns e an d are de du ct ib le as s uc h. Se e se c. 16 2( a)(1 ); s ec. 1 .16 2- 7( a), In co m e Tax Reg s. Inad di ti on to th e p aym en ts rel at edto Ms . Garci a’s car, C HMD al so m ad e at le as t two p aym en ts to wardDr. Hol de n’s M erce de s B en z. Ms . Garci a te st ifi edth at inad di ti on to see in g p at ie nt s atth e Oran ge an d An ah ei m off ic es , Dr. Hol de n typic al ly spe nthi s m orni ng s v is it in g n on am bu la to ry pa ti en ts at b oa rdan d c are faci li ti es , sk il le d n ur si ng faci li ti es , ass is te d l iv in g fa ci li ti es , andCh ap m anHos pi ta l. Sh e n ot edth athe so m et im es returne d t o the se rou nd s l at er i n the day . Even
as su m in g tha t Dr. Ho ld endro ve hi s M erce de s dur in g the se pa ti en t v is it s, pe ti ti on ers ha ve no t es tabl is he d the date , mil eag e, an d p ur po se of e ach bu si ne ss us e of th e v eh ic le , no r th e ex te ntof b us in es s v ers us pe rs on al us e. Henc e,- 54 -

[* 54 ] pe ti ti on ers ha ve no t es tabl is he d tha t the se ex pe ns es were d educ ti bl e. See
se cs . 26 2( a), 2 74 (d ); Wall is er v . Comm is si on er, 7 2 T.C. at43 7. Fi na ll y , pet it io ne rs off

eredno ev id en ce as to th e b us in es s p ur po se or o th er
reas onforfou r mis cel lane ou s ex pe ns es --a $ 46 cred itcardch arg e to “ Sh el l Oi l” , an $8 4 c he ckpaym en t t o “ Pep Bo y s Au to ”, a $ 46 ch eckto Ms . Garci a, an d c he ckNo. 1 7 87 79 , for$3 77 , to anun kn own pay ee-- do cu m en te d i n Ex hi bi t 2 4- P. Becaus e pe ti ti on ers ha ve no t es tabl is he d abu si ne ss pu rp os e fo r an y of t he se expe nd itur es , th ey are n otde du ct ib le
. Insu m , pet it io ne rs have no t, t o the ex te ntrequi redby sect io n 2 74 (d ),
subs tant ia te d any aut o andtru ckex pe ns e, so we wil l s us ta inres po nd en t’s de te rm in at io n i n tha t re ga rd . W e wil l, h owe ve r, al lo w an a dd it io na l $ 7,7 52 sal ari es
an d wag es ex pe ns e d educ ti onforMs . Garci a’s car p aym en ts . B. In te res t The en ti re am ou ntof C HMD’s $8 0,0 99 in te res t ex pe ns e d educ ti on rem ai ns indi sp ut e. CHMD’s P&L re fle ct s tha t thi s amoun t co ns is ts of $ 47 ,39 6 o f lo an in te res t an d $ 32 ,70 3 o f fi na nc e ch arg es . The ch eckis da te d M ay

3, 2 00 7, an d b ears th e n ot at io n “ U Haul Gas An a 1 7 Mo ve ” o n the m em o l in e. One m ig htin fer tha t thi s ch eckrei m bu rs edMs . Garci a fo r fu el in g aren te d U-Haul tru ckus edinm ov in g C HMD’s pr op erty ou t o f th e Ana he im off ic e p os tc lo su re, b utth atoff ic e d idno t cl os e unt il Ju ly 200 7, two m on th s af te r th e ch eckwas wri tt en .- 55 -

[* 55 ] Co m

pl em en ti ng th e al lo wan ce i n s ect io n 1 62 of d educ ti on s fo r bu si ne ss
ex pe ns es , sec ti on 16 3 aut ho riz es a co rp or at io n t o d educ t “ al l i nt eres t p ai d o r
accrue d wi th inth e ta xabl e y ear o n i nd eb te dn es s” , in cl ud in g i nt eres t p ai d o r acc ru ed
on bu si ne ss -rel at edde bt . As with o th er b us in es s ex pe ns es , ho wev er, a t axpa y er
m us t s ub st an ti at e an y

in te res t ex pe ns e fo r whi chhe cla im s a d educ ti on . See s ec. 60 01 ; Ro be rts v. Co m

m is si on er, 6 2 T.C. at83 6. To s ub st an ti at e CHMD’s cl ai m edin te res t ex pe ns e, pe ti ti on ers off eredMs
. Garci a’s te st im on y

an d Ex hi bi t 2 0- P, whi chco ns is ts of 1 35 pa ge s o f can cel ed ch eck s an d ann ot at edbankst at em en ts . At tri al pe ti ti on ers ’ co un se l af fo rd edMs
. Garci a ti m e to rev ie w th e d oc um en ts inExh ib it20 -P, an d a fte r sh e advi se d tha t sh e h adco m

pl et edhe r rev ie w, ask edhe r whe th er an y of t he paym en ts refl ect edin th os e d oc um en ts were i nt eres t p aym en ts . Ms. Gar ci a te st ifi edth atth e d oc um en ts refl ect ed“ [v ]ario us paym en ts to cred itcard s, l eas in g c om pani es , [an d] lo an rep aym en ts ” an d tha t s om e o f th em were i nt eres t p aym en ts . She expl ai ne d tha t, whe n s he en te reda lo anor c red itcardpaym en t i nt o Qu ic kb oo ks , sh e wou ldreco rd
an y in te res t o r fi na nc e ch arg e se pa rat el y fro m th e p aym en t t owa rdpri nc ip al
. Whe n p et it io ne r’s co un se l as ke d wh ethe r al l o f th e p aym en ts refl ect edin Exh ib it20 -P were “ or di na ry ” an d “ ne ces sa ry ” p aym en ts forCHMD’s b us in es s, Ms . Garci a an swe redaffi rm at iv el y . The Co urt fo un d M s. Garc iato be a cred ib le- 56 -

[* 56 ] witne ss , andwe be li ev e th is an swe r to ha ve be ensi nc ere. Nev erthe le ss , we fin d i t i m pl au si bl e th atan y

pe rs on co ul d, ev enwith p rio r pr ep arat io n, af firm with cert ai nt y aft er o nl y

a few m om en ts ’ sc ru ti ny tha t 1 35 do cu m en ts all sh areda pa rti cu lar, subs tant iv e ch arac te r. W e th eref or e g iv e th e fo reg oi ng , bl an ke t
as se rti on li tt le weig ht
. Turn in g t o Ex hi bi t 2 0- P it se lf, t o fa ci li ta te ou r an al y si s we c la ss ify the pa y ees on th e al le ge d i nt eres t p aym en ts in to th ree g ro up s: (1) Dr. Hol de n andMs
. Garci a, (2 ) Mar li n andso m e o f th e le as in g c om pa ni es , and(3) cred itcard
co m pa ni es an d o th ers . 1. Dr. Hol de n andMs . Garci a Exh ib it20 -P i nc lu de s o ne ch eck , dat edJan ua ry 8, 2 00 7, i n the am ou ntof $5 83 , m ad e o utto Dr. Hol de n. No fact s l in k thi s p ur po rte d i nt eres t ch eckto an y lo anfro m Dr. Hol de n t o C HMD orothe rwis e te ndto sh ow tha t s uc h alo anex is te d. W e h av e o nl y

Ms . Garci a’s ge ne ral iz edtes ti m on y th atso m e o f th e ch eck s i n Exh ib it20 -P were forin te res t. We cann ot , onth e cu rren t re co rd , con cl ud e th atth is ch eckto Dr. Hol de n was am on g the m . Nex t, Ex hi bi t 2 0- P in cl ud es si x c an cel edch eck s m ad e o utto Ms . Garci a th at pe ti ti on ers co nt en d re fle ctin te res t p ai d t o h er i n 2 00 7. Ms . Garci a’s te st im on y an d he r pr io r writ te n d ecl arat io n e st ab li sh edth atsh e le ntm on ey in20 04 to fin an ce- 57 -

[* 57 ] th e acqui si ti on of t he Anah ei m off ic e an d fo r pr act ic e ex pe ns es an d tha t s he ch arg edin te res t o n tho se lo an s. Ms . Garci a co nf

irmed th attwo of t he ch eck s i n Ex hi bi t 2 0- P--b ot h i n the
am ountof $ 20 8- -co ve redin te res t o nl y . A thi rdch eckfor$1 ,00 0 b ears th e n ot at io n

“ In t Lo an ” o n the m em o l in e, m uc h l ik e th e “ Loan R ep ay Int ” n ot at io n o n o ne of th e ch eck s M s. Garc iaco nf irmed was forlo anin te res t. We con cl ud e th at pe ti ti on ers ha ve ad equa te ly sub st an ti at edth es e th ree p aym en ts of i nt eres t, an d tha t th e und erl y in g l oans ha d acle ar n ex us to CHMD’s b us in es s. W e rea chth e o pp os it e co nc lu si onreg ard in g the othe r th ree p aym en ts . Ms. Garci a ex pr es se d unc ert ai nt y as t o wh ethe r th e fo urth ch eck , for$1 ,00 0, was actua ll y forin te res t o r in st eadrei m bu rs em en t fo r anoff

ic e supp li es pu rch as e. The fif th ch eck , for$1 0,0 00 , is m ark ed“ Loan R ep aym en t Ba l Pa idinFu ll ”, whi ch to ge th er wi th it s ro un d n um be r am ou ntstro ng ly sug ge st s tha t i t re pr es en te d fu ll pa ym en t o f th e p rin ci pa l b al an ce o n o ne of M s. Garc ia ’s lo an s t o C HMD. CHMD’s P& L refl ect s tha t $ 15 of t hi s p aym en t co ns ti tu te d i nt eres t, b utpe ti ti on ers of fere d n o c orro bo rat in g t es ti m on y or d oc um en tary

ev id en ce o f th is fact . For the fo reg oi ng reas on s, re sp on de ntpro pe rly dis al lo wedCHMD’s d educ ti on of t he se two cla im edin te res t ex pe ns es .- 58 -

[* 58 ] Ms . Garci a te st ifi edth atth e si xt h andfin al ch eck , dat edApri l 6 , 20 07 , inth e
am ountof $ 16 7, re pr es en te d re im bu rs em en t o f th e in te res t o n h er ca r pa ym en t. Bu t th atsame day

CHMD al so wrot e h er ch eckNo. 2 30 4 fo r th e fu ll am ou ntof h er ca r pa ym en t, i nt eres t i nc lu de d. Mo reo ve r, ev enass um in g tha t M s. Garc iarem it te d $1 67 to he r le nd er af

te r de po si ti ng CHMD’s ch eck , th e ch arac te r of th atsec on d pa ym en t d oe s n ottrans la te th ro ug h t o the fir st . Int eres t i s “ co m pe ns at io n fo r th e
us e o r fo rb earanc e o f [b orro wed ] m on ey ”. Depu ty v. Dup on t, 3 08 U.S. at 4 98 . A pa ym en t t o an i nd ep en de ntco ntract orin te nd edto off se t the co stof h er co nt ract rel at edcar trav el is no t co m pe ns at io n fo r th e u se of b orro wedfun ds . It i s, ho wev er, d educ ti bl e und er s ect io n 1 62 (a)( 1) , andwe wil l al lo w iton th atba si s. W e co nc lu de th atpe ti ti on ers ha ve ad equa te ly sub st an ti at ed$1 ,41 6 o f in te res t
ex pe ns e p ai d t o M s. Garc iaan d an a dd it io na l $ 16 7 o f sa larie s an d wag es ex pe ns e.

2. Mar li n andLeas in g C om pa ni es Exh ib it20 -P i nc lu de s n um ero us ch eck s p ay ab le to Marl in , Ban c o f Am eri ca Leas in g, Gre atAm eri ca, GE, andHPSC. Beg in ni ng with M arl in , hav in g c om pa red Mar li n’s p aym en t h is to ry rep ort fo r CHMD wi th CHMD’s P&L an d ba nkst at em en ts , we con cl ud e th atpe ti ti on ers ha ve ad equa te ly sub st an ti at edth e- 59 -

[* 59 ] fo ll owi ng lat e fee s p ai d t o M arl in : 1 8 Ch eck No. Am ou nt Date po st ed 21 84 $2 4 2/ 16 /2 00 7 22 56 19 4 3/ 12 /2 00 7 88 61 19 4 6/ 8/ 20 07 89 18 19 4 7/ 13 /2 00 7 25 54 19 4 11 /9 /2 00 7 26 19 19 4 12 /4 /2 00 7 Tota l 99 4 CHMD p ro pe rly deduc te d the se am ou nt s. 1 9 Ourco m pa ris on of the se do cu m en ts rev eal edsev eral di sc rep an ci es in 1 8 CHMD’s P& L. On Feb ru ary 9, 2 00 7, CHM D wrot e ch eckNo. 7 75 0 fo r $1 ,41 7 an d b oo ke d a$2 4 fi na nc e ch arg e fro m Marl in . Marl in ’s paym en t h is to ry reco rd refl ect s tha t thi s amoun t i s a “ [f]ee”. W e wil l al lo w deduc ti on s fo r th es e fee s un de r se c. 16 2( a) b ecau se of t he ir n ex us to CHMD’s acqui si ti on of e qu ip m en t ne ces sa ry to it s b us in es s. Inad di ti on to th e am ount s l is te d i n the tab le , CHMD acc ru edMarl in ’s st an da rdlat e fee (15 % of C HMD’s m on th ly leas e p aym en t) i n Au gu stan d Sep te m be r 20 07 , bu t M arl in ’s reco rd s re fle ctth atitdi d n otim po se a la te fee i n th os e m on th s. OnDecem be r 4, 2 00 7, CHM D bo ok eda $2 00 fin an ce ch arg e fro m Mar li n, b utMarl in ’s reco rd s re fle cton ly its st an da rd , $1 94 lat e fee . W e wil l al lo w on ly the am ou nt s co rro bo rat edby Marli n’s re co rd
. W e h av e ch arac te riz edth es e am ou nt s as lat e fee s ra th er than fi na nc e 1 9 ch arg es on th e b as is of M arl in ’s paym en t h is to ry reco rd . Marl in ’s con tra ctwith CHMD p ro vi de s fo r a l at e ch arg e o f th e g reat er o f $2 0 o r 15 % of t he pa st -due am ountan d c reat es a co ntractua l o bl ig at io n o n the part o f CHMD t o p ay th at am ount . “ [A]lth ou gh anin de bt edne ss is anob li ga ti on , an o bl ig at io n i s n ot (co nt in ue d...)- 60 -

[* 60 ] As fo r th e le as in g c om pa ni es , tak in g i nt o a cco un t o urfin di ng s co nc ern in g pe ti ti on ers ’ subs tant iati on of C HMD’s equi pm en t re nt al ex pe ns es , andha vi ng
co m pa redth e rel ev an t d oc um en ts inExh ib it20 -P ag ai ns t CHM D’ s P& L andbank st at em en ts , we con cl ud e th atpe ti ti on ers ha ve ad equa te ly sub st an ti at edth e fo ll owi ng fin an ce ch arg es pa idto th e le as in g c om pa ni es : Payee Paym en t fo rm Fi na nc e ch arg e Date po st ed Ban c o f Am eri ca Leas in g Ch eckNo. 2 20 1 $7 0 3/ 5/ 20 07 Ban c o f Am eri ca Leas in g Dire ctde bi t 10 0 4/ 16 /2 00 7 Ban c o f Am eri ca Leas in g Ch eckNo. 2 57 8 10 0 11 /2 0/ 20 07 Ban c o f Am eri ca Leas in g Ch eckNo. 2 65 4 10 0 12 /1 8/ 20 07 GE Dire ctde bi t 99 1/ 26 /2 00 7 GE Ch eckNo. 2 23 5 10 0 3/ 6/ 20 07
(...co nt in ue d) 1 9 ne ces sa ril y

an‘ in de bt edne ss ’ withi n the m ean in g o f * * * [s ect io n 1 63 ]. ” Dep ut y v. Dupo nt , 30 8 U.S. 4 88 , 49 7 (1 94 0) (ho ld in g tha t d iv id en d- equi va le ntam ou nt s pa idpu rs ua ntto a co nt ractua l o bl ig at io n wer e n otde du ct ib le un de r se c. 16 3’s pr ed eces so r st atut e). A lat e fee ch arg edby a les so r fo r fai lu re t o t im el y m ak e a le as e p aym en t i s m or e in th e n atur e o f a p en al ty than “ co m pe ns at io n fo r th e u se or fo rb eara nc e o f m on ey .” Lik e in te res t, the lat e fee pro vi de d fo r in th e Marli n co nt ractis co m

pu te d a s a p erce nt ag e o f th e am ou ntowed . Unl ik e in te res t, the lat e fee d oe s n otaccrue pe rio di cal ly butis in st eadch arg edon ly onc e. Reg ard le ss of whe th er the lat e fee s ar e d educ ti bl e as in te res t und er s ec. 1 63 , bec au se of t he ir ne xu s t o C HMD’s acqui si ti on of e qu ip m en t u se d i n the op erat io n o f it s m ed ic al pr act ic e, th ey

qu al ify as o rd in ary an d n eces sa ry bu si ne ss ex pe ns es an d wo ul d b e de du ct ib le un de r se c. 16 2( a).- 61 -

[* 61 ] GE Ch eckNo. 2 23 6 24 2 3/ 6/ 20 07 GE Ch eckNo. 2 23 7 50 3/ 6/ 20 07 GreatAm eri ca Ch eckNo. 2 26 7 37 3/ 19 /2 00 7 GreatAm eri ca Dire ctde bi t 37 4/ 16 /2 00 7 GreatAm eri ca Ch eckNo. 8 93 3 74 7/ 19 /2 00 7 GreatAm eri ca Ch eckNo. 9 10 5 37 9/ 24 /2 00 7 GreatAm eri ca Ch eckNo. 2 66 0 74 12 /2 1/ 20 07 HPSC Ch eckNo. 2 14 7 23 9 2/ 13 /2 00 7 HPSC Ch eckNo. 2 14 8 61 2/ 13 /2 00 7 HPSC Ch eckNo. 2 14 9 88 2/ 13 /2 00 7 Tota l 1,5 08 Ms . Garci a cre di bl y

tes ti fie d tha t CHM D lea se d e qu ip m en t n eces sa ry to it s bu si ne ss fro m

th es e co m

pa ni es , andpe ti ti on ers ’ ev id en ce re fle ct s tha t CHM D pai d each of t he for eg oi ng am ou nt s v iath e sa m e ch eckor d ire ctde bi t wi thwhi chit
m ad e a l eas e p aym en t. We hav e al read y de te rm in edth atth e le as e p aym en ts were
or di na ry an d n eces sa ry

bu si ne ss ex pe ns es . On th e b as is of the se fact s, we co nc lu de th atCHMD p ai d the fin an ce ch arg es pu rs uantto it s l eas es with the lea si ng
co m pa ni es . Accor di ng ly, ev enif the se am ou nt s d o n otco ns ti tu te in te res t, the y are de du ct ib le un de r se ct io n 1 62 (a).- 62 -

[* 62 ] 3. Cred itCardCo m pa ni es an d Othe rs Exh ib it20 -P al so co nt ai ns nu m ero us can cel edch eck s an d b an k s ta te m en ts
ev in ci ng paym en ts CHMD m ad e to Adv an ta , Am eri canExp res s, Ba nkof Am eri ca, Cap it al One, an d P la ti nu m Plu s, al l o f whi chap pe ar t o b e cre di t ca rdpro vi de rs , as well as “ Co m

m erci al Loan s” , Pop ul ar Leas in g, an d M cKes so n M ed ic al (al te rn at iv el y

id en ti fie d a s M cKes so n M ed ic al Surg ic al ). CHMD’s P&L re fle ct s th atitaccrue d i nt eres t o r a fi nanc e ch arg e in co nn ect io n wi theach of t he se pa ym en ts . The P&L s up pl ie s the on ly evi de nc e o f ho w m uc h o f eac h p aym en t was in te res t o r a fi na nc e ch arg e (as op po se d t o p rin ci pa l). W e h av e n o e vi de nc e o f 2 0 wha t ex pe ns es ga ve ris e to th e p rin ci pa l b al an ces on whi chin te res t o r a fi nanc e ch arg e was im

po se d. On ly if th os e ex pe ns es were b on a fi de bu si ne ss ex pe ns es
wou ldan y

in te res t o r fi na nc e ch arg e b e d educ ti bl e. 2 1
Des pi te he r br oa d a ss ert io n tha t s om e o f th e p aym en ts inExh ib it20 -P 2 0 were i nt eres t, Ms . Garci a p ro ve d u nabl e to de te rm in e wha t p orti on s o f pa y m en ts to Co m m erci al Loan s an d C ap it al One c on st itut edin te res t an d p rin ci pa l. Nei th er co un se l i nqui redab ou t p aym en ts to othe r pa y ees . Sec. 1 63 (h )(1 ) pr oh ib it s the de du ct io n o f pe rs on al in te res t. Alt ho ug h thi s 2 1 pr ov is io n e xp res sl y

ap pl ie s o nl y

to no nc or

po rat e ta xp ay ers , we th in k i t h ig hl y rel ev an t h ere, wh ere i nt eres t d educ ti on s cl ai m edby pet it io ne rs ’ who ll y own edS co rp or at io n wo ul d fl ow thr ou gh to th em . Allo win g an S co rp or at io n t o d educ t in te res t p ai d o n d eb t i nc urredto pay pe rs on al ex pe ns es of i ts so le sh areh ol de r (co nt in ue d...)- 63 -

[* 63 ] Ms . Garci a te st ifi edth atCHMD h adcred itcardacco un ts with Ad va nt a, Am eri canExp res s, an d P la ti nu m Plu s dur in g 2 00 7. Bu t p et it io ne rs di d n ot in tro du ce an y

st at em en ts forth es e acc ou nt s t o e st ab li sh th e und erl y in g e xp en se s. W e la cksu ffi ci en t ev id en ce t o d et erm in e whe th er the se purp orte d i nt eres t an d fin an ce ch arg es were d educ ti bl e und er s ect io n 1 63 or s ect io n 1 62 . As pe ti ti on ers bo re the bu rd enof p ro of

on th is is su e, we wil l s us ta inres po nd en t’s d is al lo wan ce o f th es e rep orte d i nt eres t ex pe ns es . Inco nc lu si on , of the rep orte d i nt eres t ex pe ns es rem ai ni ng indi sp ut e, CHMD
was en ti tl edto de du ct$1 ,41 6 p ai d t o M s. Garc ia , $9 94 pa idto Marl in , and$1 ,50 8 pa idto th e le as in g c om

pa ni es , or ato ta l o f $3 ,91 8.

(...co nt in ue d) 2 1 wou ldrun di rect ly con tra ry to th e p ur

po se of s ec. 1 63 (h ). In s uc h c as es , cou rts m ay rech arac te riz e th e d eb t p rin ci pa l an d any int eres t p ai d a s co ns tru ct iv e di st rib ut io ns to th e sh areh ol de r on whi chth e sh areh ol de r wou ldbe subjec t t o t ax , no t en ti tl edto de du ct io ns . See No bl e v . Commis si on er, 3 68 F.2d43 9, 4 42 -4 43 (9 th Cir . 19 66 ) (h ol di ng th ata co rp or at io n c ou ldno t d educ t, an d i ts so le sh areh ol de rs m

us t i nc lu de inin co m e, rei m bu rs em en ts pa idto th e sh areh ol de rs for pe rs on al ex pe ns es ), aff’g T.C. Me m o. 1 96 5- 84 ; En oc h v . Commis si on er, 5 7 T.C. 78 1, 7 93 -7 94 (19 72 ) (aft er co nc lu di ng th ata lo anwas, i n s ub st an ce, a p ers on al ob li ga ti on of aco rp or at io n’s co nt ro ll in g s ha reh ol de r, rech arac te riz in g the co rp or at io n’s l oa n re pa y

m en t as a co ns tru ct iv e d is tri bu ti on to th e sh areh ol de r an d di sa ll owi ng co rp or at io n’s cl ai m edin te res t d educ ti on s)
.- 64 -

[* 64 ] C. Dep reci at io n The en ti re am ou ntof C HMD’s $4 1,1 22 de pr eci at io n d educ ti on rem ai ns in di sp ut e. Sect io n 1 67 (a) a ll ows tax pa y ers en ga ge d i n atra de or b us in es s t o d educ t

“ a rea so nabl e al lo wan ce fo r th e ex haus ti on , wear an d t ear * * * of p ro pe rty us edin th e tr ad e o r bu si ne ss ”. As wi th othe r bu si ne ss ex pe ns es , ho wev er, a t ax pa y er m us t
subs tant ia te an y

de pr eci at io n fo r whi chhe cla im s a d educ ti on . See s ec. 6 00 1; Cl uc k v . Comm is si on er, 1 05 T.C. 32 4, 3 37 (19 95 ); s ee al so , e.g., Ca st il lo v. Co m m is si on er, T.C. Mem o. 2 01 3- 72 , at * 14 -* 15 (su st ai ni ng di sa ll owanc e o f cl ai m edde pr eci at io n d educ ti on wher e ta xp ay er fa il edto subs tant ia te hi s co stba si s
orothe rwis e al lo wab le de pr eci at io n) ; Fa rran v. Co m m is si on er, T.C. Mem o. 2 00 7- 15 1, 9 3 T.C.M . (CCH) 1 35 6, 1 36 0 (2 00 7) (su st ai ni ng di sa ll owa nc e o f cl ai m ed de pr eci at io n d educ ti on be cau se of t ax pa y er’s i na de qu at e subs tant ia ti on ). To
subs tant ia te en ti tl em en t t o ade pr eci at io n d educ ti onun de r th e m od ifi edacce le rat ed
co streco ve ry

syste m (MACR S) o f se ct io n 1 68 , a tax pa y er m us t s ho w th atth e pr op erty was u se d i n atra de or b us in es s an d e st ab li sh it s d ep reci ab le ba si s. See Cl uc k v . Comm is si on er, 1 05 T.C. at 3 37 ; Li dd le v. Co m mis si on er, 1 03 T.C. 28 5, 29 2- 29 3 (1 99 4) , aff’d, 6 5 F .3d32 9 (3 d C ir. 1 99 5)
. On Fo rm 45 62 , Depr eci at io n andAm orti zat io n, fi le d wi thit s 2 00 7 F orm 11 20 S, CHMD co m

pu te d i ts de pr eci at io n d educ ti on as t he su m of d educ ti on s fo r- 65 -

[* 65 ] as se ts pl acedinservi ce b efo re the 20 07 tax y ear ( pr e-2 00 7 a ss et s) an d fo r fiv e-year reco ve ry

pro pe rty pla cedinservi ce dur in g 2 00 7 (n ew as se ts ). 1. Pre- 20 07 Ass et s W ith re sp ectto th e $ 28 ,32 0 C HMD rep orte d fo r pr e-2 00 7 a ss et s, p et it io ne rs of fere d l ittl e d oc um en tary

ev id en ce an d v irtua ll y

no tes ti m on y . Exh ib it21 -P 2 2
co ns is ts of p ag es ap pa ren tl y tak enfro m

CHMD’s 2 00 5, 2 00 6, an d 2 00 7 t ax returns
an d F ed eral su m

m ary de pr eci at io n s ch edul es (su m m ary sc he du le s) pre su m ab ly pr ep aredalo ng with tho se returns . The s umm ary sc he du le s l is t p ur po rte d c os t ba se s, u se fu l l ife term s, an d p rev io us ly clai m edde pr eci at io n fo r va rio us it em s o f equi pm en t an d l eas eh ol d i m pr ov em en ts . Thi s ev id en ce wi ll no t s at is fy pe ti ti on ers ’ bu rd enof p ro of . Thata ta xp ay er cl ai m s a d educ ti on on anin co m e ta x re tu rnis no t s uf fic ie ntto subs tant ia te th e
un de rlyin g e xp en se . W il ki ns on v. Co m m is si on er, 7 1 T.C. 6 33 , 63 9 (1 97 9) . An in co m e ta x re tu rn“ is m erel y a st at em en t o f th e * * * [ta xp ay er’s] clai m * * * ; itis
no t p res um edto be co rrec t.” Ro be rts v. Co m m is si on er, 6 2 T.C. at83 7. We acco rd
no gre at er wei gh t t o d ep reci at io n s ch edul es pre pa redto faci li ta te fil in g a
Dr. Hol de n d es cri be d s om e o f th e equi pm en t tha t CHM D own ed , 2 2 in cl ud in g an X-r ay

m ach in e, bu t p ro vi de d n o fu rth er i nf orm at io n. Dr. Ho ld enals o te st ifi edth atCHMD’s acc ou nt an t, As hl ey Hall sm an , det erm in edwhi chequi pm en t it em s wo ul d b e d ep reci at edwitho uthi s g ui da nc e. Ms . Hall sm andi d n ottes ti fy
.- 66 -

[* 66 ] return. Se e, e.g ., Any an wu v . Comm is si on er, T.C. Mem o. 2 01 4- 12 3, at*2 8- *2 9 (s us ta in in g the Co m

m is si on er’s d is al lo wan ce o f a t ax pay er’s d ep reci at io n de du ct io n wh ere the tax pay er “ di d n otpro vi de an y tes ti m on y

or o th er ev id en ce at tri al to ex pl ai n the nu m

be rs ap pe ari ng on ” th e Fed eral su m m ary de pr eci at io n
sc he du le fil edwith h er re turn ); B as al yk v . Comm is si on er, T.C. Mem o. 2 00 9- 10 0, 97 T.C.M. (CCH) 1 51 6, 1 51 9 (2 00 9) (su st ai ni ng th e Co m m is si on er’s d is al lo wan ce of th e ta xp ay ers ’ de pr eci at io n d educ ti on wher e th e ta xp ay ers off eredno “ cred ib le te st im on ia l o r do cu m en tary ev id en ce” t o c orro bo rat e “un subs tant iate d fi gu res
as se rte d o n the [ir ] de pr eci at io n s ch edul e”). Altho ug h we r eco gn iz e th atreco rd s s ub st an ti at in g C HMD’s de pr eci at io n de du ct io n m ay

ha ve be ende stro y edinth e 2 00 9 fl oo d, thi s m is fo rtu ne en ti tl ed pe ti ti on ers to est ab li sh th e rel ev an t fa ct s wi th othe r cre di bl e ev id en ce, n otto rel y
so le ly on t ax returns an d u nc orro bo rat edass ert io ns . See Ma li no wsk i v
. Co m m is si on er, 7 1 T.C. at11 24 -1 12 5. Al th ou gh m em or ie s fa de an d thi rdparti es do no t re ta inreco rd s i nd efi ni te ly, pe ti ti on ers co ul d h av e o ffer edtes ti m on y
co nc ern in g wh atth e as se ts were, wh enth ey were p ur ch as ed , and/o r ge ne ral ly how
m uc h the y co st ; cr ed itcardst at em en ts or v en do rs ’ reco rd s o f th e p ur ch as es ; o r
m at eri al s re fle ct in g the m ark etpri ces of t he same or s im il ar as se ts , hi st or ic al ly or
ev enat the ti m e o f tr ia l. The y off eredno ne of t he se th in gs .- 67 -

[* 67 ] 2. New Ass et s W ith re sp ectto th e $ 12 ,80 2 C HMD cl ai m edforne w ass et s, p et it io ne rs
co nt en d tha t CHM D pu rch as edequi pm en t fr om Marl inan d Key durin g 2 00 7 and de pr eci at edth atequi pm en t. Ali gn in g wi th th atth eo ry , th e 2 00 7 s umm ary sc he du le sh ows de pr eci at io n o f $1 2,8 02 for“ COMP UTER/SOFTWARE” all eg ed ly acqu ire d
on Ju ne 11 , 20 07 , with ade pr eci ab le ba si s o f $6 4,0 10 . W e h av e fo un d tha t CHM D ob ta in edequi pm en t fr om an d m ad e p aym en ts to ta li ng $3 3,4 70 to Marl inan d Key du rin g 2 00 7 p ur su an t t o a gr eem en ts th atare, fa ci al ly, le as e ag reem en ts . Peti ti on ers ineffe ctco nt en d tha t the se pay m en ts were n otren t b utrathe r in st al lm en ts to ward th e equi pm en t’s p ur ch as e p ric e, an d tha t h av in g p ur ch as edth e equi pm en t fr om Mar li n andKey , CHMD was en ti tl edto de pr eci at e it
. Whe th er CHM D was en ti tl edto cla im de pr eci at io n d educ ti on s fo r th e equi pm en t i t ac qu ire d u nd er tho se ag reem en ts de pe nd s upo n wh ethe r itbo re the
eco no m ic lo ss of i nv es te d c ap it al res ul ti ng fro m th e equi pm en t’s ex haus ti on , wear,
an d t ear. Hel ve rin g v . F. & R. Lazarus & Co ., 30 8 U.S. 2 52 , 25 4 (1 93 9)
. Whi le itm ay

m or e o fte n b e th athe who is bo th own er an d u se r be ars th e b ur de n o f wear andex haus ti on of b us in es s p ro pe rty in t he na tu re of cap it al , on e who is no t the own er m ay ne ve rth el es s b ear the bu rd en of ex haus ti on of c ap it al in ve st m en t. Where itha s b eensh own th ata le ss ee u si ng pro pe rty in atra de or b us in es s m us t i nc ur th e lo ss- 68 -

[* 68 ] res ul ti ng fro m

de pr eci at io n o f cap it al he ha s i nv es te d, the les se e h as be enhe lden ti tl edto th e st atut ory de du ct io n. [I d.] See a ls o C or li ss v. Bo wers , 28 1 U.S. 3 76 , 37 8 (1 93 0) (“ [T]axat io n i s n otso m uc h
co nc ern edwith the refi ne m en ts of t it le as i t i s wi th actua l co m m an d o ve r th e pr op erty tax ed --the actua l b en efi t fo r whi chth e ta x i s p ai d.” ). Inad dr es si ng whi chof t he parti es to anequi pm en t l eas e is en ti tl edto de pr eci at io n d educ ti on s, we an d o th er co urts ha ve inso m e in st an ces rech arac te riz edpu rp orte d l eas e ag reem en ts as c on di ti on al sal es co nt ract s. See , e.g ., SwiftDod ge v. Co m m is si on er, 6 92 F.2d65 1, 6 54 (9t h C ir. 1 98 2) , rev ’g 76 T.C. 54 7 (1 98 1) ; Un it edCir cu it s, In c. v. Co m m is si on er, T.C. Mem o. 1 99 5- 60 5, 7 0 T.C.M. (CC H) 16 19 , 16 21 -1 62 2 (1 99 5) ; Li eb er v . Comm is si on er, T.C. Mem o. 19 93 -3 91 , 66 T.C.M. (CCH) 5 29 , 53 6- 53 7 (1 99 3)
. 2 3 A con di ti on al sal e is on e in whi ch“ th e se ll er re se rv es ti tl e unt il th e b uyer pa y s fo r th e g oo ds . At th atti m e, th e co nd it io n i s fu lfi ll edan d t it le pa ss es to th e bu y er.” Swi ft Do dg e v . Comm is si on er, 6 92 F.2dat 6 53 . Whe reas a le as e The Econ om ic Reco ve ry

Tax Actof 1 98 1, Pub. L. No. 9 7- 34 , sec . 20 1( a), 2 3 95 Sta t. at21 4- 21 6, cr eat eda sa fe h arb or un de r whi cha pu rp orte d l eas e wou ldbe tre at edas alea se , andth e le ss oras t he lea se d p ro pe rty’ s o wne r, fo r pu rp os es of cl ai min g d educ ti on s u nd er the ori gi na l ac cel erat edco streco ve ry syste m (ACRS)
. See a ls o s ec. 5 c.1 68 (f)(8 )-1 (a), Tem po rary Inco m e Tax Reg s., 4 6 F ed . Reg . 51 90 7 (Oct . 23 , 19 81 ). W

he n C on gr es s re pl acedACRS wi th MACRS in19 86 , itdi d n ot reen actth e sa fe h arb or , see Tax R efo rm Act o f 19 86 , Pub . L. No. 99 -5 14 , sec . 20 1( a), 1 00 Sta t. at21 25 , so we wil l re ly upo n c as el aw.- 69 -

[* 69 ] co nt em

pl at es on ly a les se e’s us e o f th e p ro pe rty for a l im it edpe rio d andit s return at tha t p eri od ’s exp ira ti on , “ ‘a con di ti on al sal e co nt em pl at es th e u lt im at e
own ers hi p o f th e p ro pe rty by th e b uyer, to ge th er wi th th e u se of i t i n the
m ean ti m e’”. Bowenv. Co m m is si on er, 1 2 T.C. 4 46 , 45 9 (1 94 9) (qu ot in g In re Rai ne y , 31 F.2d19 7, 1 99 (D. Md . 19 29 )). Thu s, the pu ta ti ve les se e und er a
co nd it io na l s al es co nt ractm ay cla im de pr eci at io n d educ ti on s. See , e.g., Mc Kin se y v. Co m m is si on er, T.C. Mem o. 1 98 4- 51 4, 4 8 T.C.M . (CCH) 1 22 5, 1 23 4, 1 23 9 (1 98 4)
. InSwiftDod ge th e Co urt o f App eal s fo r th e Nin th Cir cu itex am in edsev eral fact or s i n fi nd in g tha t an “ op en -en de d” ve hi cl e le as e was infacta co nd it io na l s al e. Inth at“ op en -en de d” lea se , th e le ss ee was requi redto pay , when th e le as e te rm in at ed , th e am ou nt , if a ny, by whi chth e es ti m at ed“ de pr eci at edva lu e” o f th e v eh ic le , as se t fo rth inth e ag reem en t, ex ceed edit s ac tu al who le sa le va lu e. Si m il arl y , if the actua l wh ol es al e v al ue of the ve hi cl e ex ceed edit s es ti m at ed“ de pr eci at edva lu e,” the les se e wou ld“ rece iv e an y ga in whi chres ul t[e d] fro m

fin al di sp os it io n o f th e v eh ic le . * * *” [Swif t Dod ge v. Co m

m is si on er, 6 92 F.2dat 6 52 (qu ot in g S wiftDod ge v. Co m m is si on er, 7 6 T.C. 5 47 , 55 4, 5 68 -5 69 n.1 1 (1 98 1) ).] The co urt l oo ke d t o h ow the ag reem en t al lo cat eddu ti es , no ti ng th atth e al lo cat io n d idno t d iff

er fro m th attypic al of a n i ns ta ll m en t s al e. Id . at 6 53 . For
ex am pl e, th e le ss ee was ob li ge d t o i ns ur e th e v eh ic le an d t o p ay all op erat in g and- 70 -

[* 70 ] m ai nt en an ce ex pe ns es no t co ve redby the m anuf actur er’s warrant y . See i d. The n, the co urt ex am in edth e p art ie s’ leg al rig ht s, ag ai n fi nd in g the m “ es se nt ia ll y th e sa m e” as un de r a co nd it io na l s al e co ntractpro vi di ng fora ba ll oo n p aym en t. See i d. Al th ou gh th e le ss or ret ai ne d l eg al ti tl e an d c ou ldass ig n i ts rig htto rece iv e th e le ss ee’s p aym en ts , th e le ss ee h adth e ri gh t t o u se th e v eh ic le so lo ng as h e
sa ti sf ie d the ag reem en t’s t erm s, an d a t the co nc lu si on of t he lea se term , cou ld acqui re t it le to th e v eh ic le forit s “ de pr eci at io n v al ue as s pe ci fie d i n the ag reem en t.” Id
. Nex t, the co urt an al yzedth e p art ie s’ ris ks , con cl ud in g tha t the les se e

“ as su m edth e ri skof d am ag e, th eft , * * * d es tru ct io n” , andde pr eci at io n, wh erea s th e le ss orbo re o nl y

th e ri skof t he les se e’s de fau lt , as wo ul d b e true of asec ur ity in te res t h ol de r in a co nd it io na l s al e. See i d. at65 4. Fi na ll y , th e co urt i n S wift Dod ge ev al ua te d the parti es ’ in te nt io ns , ob se rv in g tha t the ir s ta te d i nt en ti on was t o
en ga ge ina le as e arr an ge m en t. See id . Notwiths tand in g tha t s ta te d i nt en ti on , th e
co urt co nc lu de d the lea se s wer e in factco nd it io na l s al es . See i d. Ourowncas el aw rev eal s ad di ti on al fact or s re le va ntto de te rm in in g wh ic h pa rty un de r a p ur

po rte d l eas e b ears th e b en efi ts an d b ur de ns of o wne rs hi p. Th es e in cl ud e whe th er the lea se d p ro pe rty has a us efu l l ife th atex te nd s b ey on d the lea se te rm , andwhet he r th e strik e p ric e o f an y pu rch as e o pt io n a t the en d o f th e le as e- 71 -

[* 71 ] term

is no m in al rel at iv e to th e to ta l p aym en ts requi redun de r th e p ur po rte d le as e. See Lev y

v. Co m m is si on er, 9 1 T.C. 8 38 , 86 0 (1 98 8) ; Lo ckha rt Lea si ng Co
. v. Co m m is si on er, 5 4 T.C. 3 01 , 31 4- 31 5 (1 97 0) , aff’d, 4 46 F.2d26 9 (1 0th C ir. 19 71 ); B owe n v . Comm is si on er, 1 2 T.C. at46 1; cf. Rev . Pro c. 20 01 -2 8, 2 00 1- 1 C.B. 1 15 6 (p ro vi di ng gu id el in es forob ta in in g an a dv an ce ru li ng co nc ern in g the Fed eral tax tre atm en t o f pu rp orte d l eas es ); R ev . Rul . 55 -5 40 , 19 55 -2 C.B. 3 9 (li st in g fa ct or s the Co m

m is si on er co ns id ers inde te rm in in g the Fed eral in co m e ta x tre atm en t o f equi pm en t l eas es ). W e b eg inwith the parti es ’ du ti es un de r th e p ur po rte d l eas es . Like th e ag reem en t i n S wiftDod ge , bo thth e Marli n a gr eem en t an d the Key ag reem en t ob li ge d C HMD, as th e p ut at iv e le ss ee, t o i ns ur e th e equi pm en t an d t o b ear the co st of all rep ai rs an d m ai nt en an ce. The ag reem en ts ad di ti on al ly requ ire d C HMD to pa y an y an d a ll tax es du e o n the equi pm en t. Turni ng to th e p art ie s’ rig ht s, l ik e th e le ss ee i n S wiftDod ge , whi le Marl inan d Key retai ne d l eg al ti tl e to th e equi pm en t, CHMD was en ti tl edto us e itth ro ug ho utth e ap pl ic ab le term . It was als o e nt it le d
un de r th e Marli n a gr eem en t, an d o bl ig edun de r th e Key ag reem en t, t o p ur ch as e th e equi pm en t fo r a s pe ci fie d n om in al pri ce atth atterm ’s con cl us io n. Als o l ik e th e le ss ee i n S wiftDod ge , CHMD b or e th e ri sk s o f da m ag e, th eft , an d d es tru ct io n: Bot h p ur po rte d l eas es pl acedall res po ns ib il ity forda m ag e to th e- 72 -

[* 72 ] equi pm en t wi th CHMD an d u nc on di ti on al ly requ ire d i t t o p ay th e fu ll
am ountof a ll pay

m en ts pro vi de d fo r th erei n. CHM D als o b or e th e ri skof de pr eci at io n. Fo r ta x p ur po se s, b ot h p ur

po rte d l eas es ha d fi ve -y ear t erm s, an d a s qu al ifi edtec hn ol og ic al equi pm en t, s ee s ec. 1 68 (e)( 3) (B)( iv ), (i) (2 )(A)(i ), th e
co m pu te rs an d p eri ph eral it em s p ro vi de d the reu nd er were fiv e-year pro pe rty and
wou ldth us ha ve be enful ly dep reci at edun de r MACR S atth e en d o f th e ag reem en ts ’ te rm s. If the equi pm en t wer e ex haus te d m or e qui ck ly, CHMD wo ul d st il l b e o bl ig edto m ak e al l p aym en ts forit . If th e equi pm en t wer e ex haus te d m or e sl owl y , CHMD m ig htbe ab le to real iz e a g ai n b y pu rch as in g the equi pm en t atth e le as e te rm s’ con cl us io ns or b y co nt in ui ng to us e itinth e m ed ic al pra ct ic e. Fi na ll y , li ke th e ag reem en t i n S wiftDod ge , th e Marli n a gr eem en t re ci te s the pa rti es ’ in te nt io n tha t i t b e res pe ct edas atru e le as e; th e Key ag reem en t co nt ai ns an
an al og ou s p ro vi si on . Butli ke th e Co urt o f App eal s i n S wiftDod ge , we do no t
co ns id er the se st at edin te nt io ns di sp os it iv e in th e li gh t o f th e cl earl y co nt rary facts
. Tho se co ntrary facts als o d is ti ng ui sh th is cas e fro m Lockha rt Lea si ng Co . v. Co m m is si on er, 5 4 T.C. at31 5, i n wh ic h we r eject edth e Co m m is si on er’s arg um en ts th atall eg edlea se s wer e sa le s. See als o Nw. Acce pt an ce Co rp . v. Co m m is si on er, 58 T.C. 83 6, 8 46 -8 50 (19 72 ) (o n “ ne arl y co ng ru ou s” fact s, re fu si ng un de r Loc kh art Leas in g C o. t o re ch arac te riz e anall eg edlea se as aco nd it io na l s al e ag reem en t),- 73 -

[* 73 ] aff’d, 5 00 F.2d12 22 (9th C ir. 1 97 4) . In Lo ckha rt Lea si ng Co . v. Co m m is si on er, 5 4 T.C. at30 1- 30 2, the tax pa y er’s “bu si ne ss act iv it ie s co ns is te d o f th e p ur ch as e o f pe rs on al pro pe rty for u se of o th er p ers on s” purs ua ntto an ag reem en t t it le d a s anequi pm en t l eas e. As was tru e o f Mar li n, i f no t Key, th e ta xp ay er wo ul d g en eral ly buy equ ip m en t s pe ci fie d i n a dv an ce b y a pr os pe ct iv e le ss ee, the n tran sf

er i t t o the les se e. See i d. at30 2. Lik e th e ag reem en ts he re, the ta xp ay er’s l eas es ass ig ne d the les se e al l t ax , in su ran ce, an d m ai nt en an ce ob li ga ti on s as well as a ll li ab il ity forlo ss , th eft , des tru ct io n, o r da m ag e o f th e equi pm en t. See id . at 3 03 -3 04 . Andli ke th e Marli n a gr eem en t, the tax pa y er’s ag reem en ts oft engra nt edth e le ss ee an op ti on to pu rch as e th e equi pm en t atth e en d of th e le as e. See i d. at30 6- 30 7. Yet i n s ha rp co nt ras t t o the in st an t ca se , th e ta xp ay er i n Lo ckha rt Lea si ng Co . di d n otpre ve ntles se es fro m term in at in g the ir l eas es be fo re the en ds of the ir te rm s, an d i t re -le as edor r e-s ol d p ro pe rty retu rn edto it . See i d. at30 2, 3 04 . The Mar li n andKey

ag reem en ts un co nd it io na ll y ob li ga te d C HMD to pay

all am ou nt s du e und er the lea se s, thr ou ghth e en d o f th ei r te rm s. Th e Key ag reem en t affi rm at iv el y

requi redCHMD t o b uy the equi pm en t. Alt ho ug h the Marl in ag reem en t’s p ur ch as e o pt io n app ears no t t o h av e b eenob li ga to ry , gi ve n the na ture of th e “ le as ed ” equi pm en t (c om pu te rs an d p eri ph eral equi pm en t), we que st io n- 74 -

[* 74 ] whe th er i ts us efu l l ife wou ldha ve subs tant ia ll y ex ceed edth e ag reem en t’s fiv e-year term , su chth atMarl inco ul d h av e re- le as edor s ol d i t h adCHMD returne d itaft er fi ve y ears . Furth er, the tax pa y er i n Lo ckha rt Lea si ng Co . gav e le ss ees th e o pt io n t o pu rch as e rel at iv el y

rare ly, ge ne ral ly at a p ric e equa l t o 1 0% o f th e equi pm en t’s
or ig in al co st , andwhenno su chop ti on was g iv en , itne go ti at eda pu rch as e p ric e at
arm ’s len gt h. Se e id . at 3 07 , 31 5. Here , inco ntras t, the op ti on pri ces were
no m in al --$ 10 1 u nd er the Marl inag reem en t an d $ 1 u nd er the Key ag reem en t. In
an y ev en t, the no m in al $1 01 purch as e p ric e m or e th anoff se ts an y us efu l l ife
co ns id erat io ns gi ve n tha t the les se e, if itdi d n otpu rch as e th e equi pm en t, was requi redto return i t t o the les so r “ ingo odwork in g c on di ti onina m an ne r an d t o a lo cat io n d es ig na te d b y ” th e le ss oran d t o p ay “ an y co stto refu rb is h the Equ ip m en t” in cu rredby the les so r. Altho ug h the reco rddo es no t d is cl os e th e equi pm en t’s
or ig in al co stto Marl inan d Key, the paym en ts un co nd it io na ll y du e und er the ag reem en ts --$ 80 ,14 9 t o M arl inan d $ 85 ,27 4 t o Key--so dwar fedth e n om in al strik e pr ic es th atCHMD wo ul d a lm os t s ur el y ha ve ex erci se d the op ti on s. CHM D’ s ul ti m at e acqui si ti on of t it le was t an tam ountto a fo reg on e co nc lu si on . Des pi te th ei r labe ls , th e p ur po rte d l eas es were, i n s ub st an ce, i ns ta ll m en t s al e ag reem en ts . W ith re sp ectto bo th Marl inan d Key, we con cl ud e th atth e p art ie s- 75 -

[* 75 ] co nt em

pl at edfro m

th e b eg in ni ng th atCHMD wo ul d a cqui re o ut rig ht
own ers hi p o f th e equi pm en t af te r fi ve y ears . W e h ol d tha t CHM D ass um edth e be ne fit s an d b ur de ns of o wne rs hi p wi th res pe ctto th e equi pm en t i t ac qu ire d fr om Mar li n andKey

inJan ua ry

20 07 , andth atitwas a cco rd in gl y en ti tl edto a de pr eci at io n d educ ti on forth atequi pm en t. Fo r CHMD t o c la im

th atde du ct io n u nd er MAC RS, i t m us t es tabl is h i ts de pr eci ab le ba si s i n the equi pm en t. Onit s Fo rm 11 20 S an d o n the de pr eci at io n
sc he du le pe ti ti on ers in tro du ced , CHMD cl ai m eda co stba si s i n the equi pm en t o f $6 4,0 10 . CHMD’s ag reem en ts with M arl inan d Key do no t d is cl os e p ur ch as e pr ic es or o th er v al ue s fo r th e equi pm en t, b utth ey do pro vi de forpaym en ts to ta li ng , res pe ct iv el y , $8 0,1 49 an d $ 85 ,27 4. Vi ewin g the lea se s as in st al lm en t s al e ag reem en ts , th es e am ou nt s m us t i nc lu de bo th a pr of

itan d p rin ci pa l co m

po ne nt --the equi pm en t’s p ur ch as e p ric e, an d h en ce CHM D’ s co stba si s- -an d an i nt eres t
co m po ne nt . Becau se th e ag reem en ts are fr am edas l eas es , ho wev er, the y do no t di sc lo se th e in te res t ra te s i m po se d, s o we c an no t re ly upo n the se to ta ls to co m pu te th e p rin ci pa l due un de r eac h a gr eem en t. On the reco rdbe fo re the Co urt, CHM D pl ai nl y ha d s om e d ep reci ab le ba si s inth e equi pm en t an d was en ti tl edto cla im a de pr eci at io n d educ ti on , bu t CHM D ha s n otde fin it iv el y

est ab li sh edth atba si s o r th e am ountof t he all owabl e- 76 -

[* 76 ] de du ct io n. Th e Co urt wi ll th eref or e ap pl y th e Co ha n ru le . Giv enth e to ta l
am ount s due un de r CHMD’s ag reem en ts with M arl inan d Key, andgi ve n the
na tu re o f th e equi pm en t ac qu ire d the reu nd er, the Co urt co nc lu de s tha t $ 64 ,01 0 i s a
reas on ab le co m

pu ta ti on of C HMD’s de pr eci ab le ba si s i n tha t equi pm en t. We will th eref or e al lo w a de pr eci at io n d educ ti on of $ 12 ,80 2 a s cl ai m edby pet it io ne rs an d red et erm in e res po nd en t’s d et erm in at io n t o tha t ex te nt . D. Su m

m ary Fo r th os e k eep in g s co re, p et it io ne rs ha ve ad equa te ly sub st an ti at ed , and CHMD was en ti tl edto de du ct , th e fo ll owi ng am ou nt s o f th e d is pu te d e xp en se s:

Exp en se Am ou nt

atis su e Am ou nt

al lo wed Sal ari es an d wag es $1 11 ,13 8 $8 2,9 13 Ren ts 80 ,30 0 77 ,85 8 In te res t 80 ,09 9 3,9 18 Dep reci at io n 41 ,12 2 12 ,80 2 Oth er d educ ti on s Sup pl ie s 11 ,61 3 -0- Office 36 ,25 8 -0
- Dues an d s ub sc rip ti on s 6,4 01 4,5 51 Con tra ctlab or 9,9 70 7,1 80 Auto an d tru ck 10 ,54 1 -0- Tot al 38 7,4 42 18 9,2 22- 77 -

[* 77 ] III. Accu racy-Rel at edPen al ty Inth e n ot ic e o f de fic ie nc y res po nd en t d et erm in edanaccu racy-rela te d pe na lty un de r se ct io n 6 66 2( a) an d (b )(1 ), (2 ), or(3) on th e b as is of n eg li ge nc e o r di sr eg ardof rul es an d re gu la ti on s, a s ub st an ti al un de rs ta te m en t o f in co m e ta x, o r a
subs tant ia l v al ua ti on m is st at em en t. As a g en eral rul e, th e Co m m is si on er b ears th e 2 4 bu rd enof p ro du ct io n and“ m us t co m e fo rwardwith s uf fic ie ntev id en ce i nd ic at in g th atitis ap pr op ria te to im po se th e rel ev an t p en al ty.” H ig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ); s ee al so sec . 74 91 (c). On ce re sp on de ntha s m etth is bu rd en of pro du ct io n, the burd enwil l s hi ft t o p et it io ne rs to pro ve anaffi rm at iv e d efen se or th atth ey are o th erwi se no t l iabl e fo r th e p en al ty. See Hi gb ee v . Comm is si on er, 1 16 T.C. at 4 46 -4 47
. A. Pet it io ne rs ’ Liab il ity Sect io n 6 66 2( a) an d (b )(3 ) pr ov id es forim po si ti on of a20 % pe na lty on th e po rti onof a n u nd erp aym en t o f ta x re qu ire d t o b e sh own on a return tha t i s at tri bu tabl e to a subs tant ia l v al ua ti on m is st at em en t. Fo r returns fil edon or a fte r Aug us t 1 7, 2 00 6, as is rel ev an t h ere, a s ub st an ti al va lu at io n m is st at em en t o ccu rs whe n “ th e v al ue of a ny pro pe rty (or the ad jus te d b as is of a ny pro pe rty) clai m edon

The se rep res en t al te rn at iv e g ro un ds forim po si ti on of the pe na lty , as the 2 4 accu racy-rela te d p en al ti es do no t s ta ck . See s ec. 1 .66 62 -2 (c), In co m e Tax Reg s.- 78 -

[* 78 ] an y return o f ta x i m

po se d b y ch ap te r 1 i s 1 50 pe rcen t o r m or e o f th e am ou nt de te rm in edto be th e co rrec t am ou ntof s uc h v al ua ti on or a dju st edba si s (a s the cas e
m ay be )”. Sec . 66 62 (e)( 1) (A). The n ot ic e o f de fic ie nc y do es no t ex pl ai n wh at pr op erty ’s val ue or a dju st edba si s re sp on de ntbe li ev es pe ti ti on ers m is st at ed
. Res po nd en t d idno t d is cu ss th is is su e attri al an d h as no t ad dr es se d i t o n b rie f. As th e Co urt ca n fi ndno ba si s fo r th is pe na lty inth e rec or d, we fi ndpe ti ti on ers no t li ab le forth e subs tant ia l v al ua ti on m is st at em en t p en al ty. Sect io n 6 66 2( a) an d (b )(1 ) an d (2 ) pr ov id es forim po si ti onof a20 % pe na lty
on th e p orti on of a n u nd erp aym en t o f ta x attrib ut ab le to ne gl ig en ce o r di sr eg ardof
ru le s an d re gu la ti on s o r a s ub st an ti al un de rs ta te m en t o f in co m e ta x.

“ ‘[N] eg li ge nc e’ inc lu de s an y fai lu re t o m ak e a rea so nabl e at te m ptto co m pl y with th e p ro vi si on s o f * * * [t he Int ern al Rev enue Co de ]”. Sec. 6 66 2( c). Itco ns ti tu te s

“ ‘a lackof due care or the fai lu re t o d o wh ata reas on ab le an d o rd in ari ly pru de nt pe rs on wou lddo un de r th e ci rcu m st an ces .’ ” Freytag v. Co m m is si on er, 8 9 T.C. 84 9, 8 87 (19 87 ) (quo ti ng Marc el lo v. Co m m is si on er, 3 80 F.2d49 9, 5 06 (5t h C ir. 19 67 ), aff’g 4 3 T.C. 1 68 (19 64 ) an d T.C. Me m o. 1 96 4- 29 9) , aff’d, 9 04 F.2d10 11 (5 th Cir . 19 90 ), aff’d, 5 01 U.S. 86 8 (1 99 1) . “ ‘N eg li ge nc e’ als o i nc lu de s an y fai lu re by the tax pa y er t o k eep ad equa te bo ok s an d re co rd s o r to subs tant ia te it em s pr op erl y .” Sec. 1 .66 62 -3 (b )(1 ), In co m e Tax Reg s. Dis reg ardof rul es an d- 79 -

[* 79 ] reg ul at io ns “ in cl ud es an y care le ss , reck le ss , or i nt en ti on al di sr eg ardof” th e Co de , reg ul at io ns , or c ert ai n IR S adm in is tra ti ve gu id an ce. Id . subp ara. (2 ). A
subs tant ia l u nd ers ta te m en t o f in co m e ta x a s t o an i nd iv idua l t ax pa y er i s g en eral ly
anun de rs ta te m en t tha t ex ceed s the gre at er o f $5 ,00 0 o r 10 % of t he tax requi redto be sh ownon th e return. Se c. 66 62 (d )(1 )(A). Whe th er a s ub st an ti al un de rs ta te m en t ex is ts , andif s o, i n wh atam ou nt , wil l de pe ndup on th e rec al cu la ti on of p et it io ne rs ’ ta x l iabi li ty in the li gh t o f th is op in io n. Al th ou gh we lea ve th is cal cu la ti on to th e p art ie s u nd er Ru le 15 5, i t s eem s
ne arl y cert ai n, g iv enth e d is al lo wan ce o f m or e th an$2 00 ,00 0 o f pe ti ti on ers ’ cl ai m edpa ss th ro ug h l os s fr om CHMD, se e supr a p artII.D, th atpe ti ti on ers ’
un de rs ta te m en t wi ll ex ceed10 % of t he ir t ax li ab il ity , whi chwil l b e g reat er tha n $5 ,00 0, an d tha t the pe na lty wil l ap pl y . W ith re ga rdto th e n eg li ge nc e p en al ty, res po nd en t co nt en ds th atpe ti ti on ers
were n eg li ge ntbe cau se th ey fai le d t o m ai nt ai n b oo ks an d re co rd s s uf fic ie ntto
subs tant ia te CHMD’s in co m e an d e xp en se s. We agre e. As s etforth at l en gt h
supr a, pe ti ti on ers co ul d n otsubs tant ia te ov er h al f th e am ou ntof e xp en se s
rem ai ni ng at i ss ue . Sim il arl y , alt ho ug h the y cla im edth at$1 57 ,24 3 o f CHMD’s $1 71 ,17 7 o f un rep orte d d ep os it s was no nt ax ab le lo anpro ceed s, the y subs tant ia te d
on ly a sin gl e lo an , of $ 9,0 00 . Peti ti on ers off eredno ev id en ce o r arg um en t- 80 -

[* 80 ] co nc ern in g the ba lanc e o f CHMD’s u nr ep orte d d ep os it s, an d the y li ke wis e at te m pt edto subs tant ia te on ly porti on s o f CHMD’s rep orte d e xp en se s. Th es e
subs tant ia ti on fai lures co ns ti tu te ne gl ig en ce fo r pu rp os es of s ect io n 6 66 2( a). See
se c. 1.6 66 2- 3( b) (1 ), In co m e Tax Reg s. Dr. Hol de n’s ap paren t l ackof a tt en ti on to hi s m ed ic al pra ct ic e’s fi na nc es
ex acerba te d the de arth o f do cu m en tary ev id en ce co nc ern in g C HMD’s in co m e an d
ex pe ns es . For e xa m

pl e, Dr. Hol de n t es ti fie d tha t h e rec al le d b orro win g fr om Medware b utkn ew no th in g abo utth e co m pa ny andco ul d n otreca ll th e am ou ntof th e lo anor wh ethe r CHMD h adrep ai d any of it . Grant ed , CHMD ex pe rie nc ed
se ve re fi nanc ia l d iff

ic ul ti es du rin g 2 00 7 and , inDr. Hol de n’s wo rd s, was

“bo rro win g fr om

an y on e.” Bu t we thi nkth ata reas on ab ly pru de nttax pa y er wh os e who ll y own edS co rp or at io n b orro wedm or e th an$1 00 ,00 0 fr om a th irdparty
wou ldha ve at l eas t s om e id ea o f ho w m uc h was owedan d wh ethe r an y paym en ts ha d b eenm ad e. Furth er, wh enpe ti ti on ers ’ co un se l as ke d Dr. Ho ld ento ex am in e CHMD’s ba nkst at em en ts , he a ss ert edth athe ha d n ot , “ to [hi s] * * * kno wled ge ”, run pe rs on al ex pe ns es th ro ug h C HMD’s bu si ne ss acco un t. Yetpe ti ti on ers th em se lv es pr es en te d e vi de nc e th atCHMD m ad e two paym en ts on Dr. Hol de n’s M erce de s Ben z. “ [A]ttem

pt [s ] to de du ctpe rs on al expe ns es inco nt rav en ti on of the pl ai n- 81 -

[* 81 ] lang ua ge of s ect io n 2 62 co ns ti tu te [] neg li ge nc e.” Bo ndv. Co m m is si on er, T.C. Mem o. 2 01 2- 31 3, at*1 3- *1 4 (f n. re f. om it te d) ; ac co rd , e.g., Co r v. Co m m is si on er, T.C. Mem o. 2 01 3- 24 0, at*8 ; WSB Liqui da ti ng Co rp . v. Co m m is si on er, T.C. Mem o. 2 00 1- 9, 8 1 T.C.M . (CCH) 1 00 7, 1 01 2 (2 00 1)
. Res po nd en t h as sat is fie d h is bu rd enof p ro du ct io n wi th reg ardto th e
ne gl ig en ce p en al ty, so we tu rnto pe ti ti on ers ’ de fen se . B. Pet it io ne rs ’ Defen se 2 5 Sect io n 6 66 4( c) g en eral ly pro vi de s a d efen se to th e se ct io n 6 66 2( a) p en al ty with re sp ectto an y

po rti on of an u nd erp aym en t o f ta x fo r whi chth e ta xp ay er h ad
reas on ab le cau se an d wi th res pe ctto whi chth e ta xp ay er ac te d i n g oo d fa ith. “ The de te rm in at io n o f whe th er a t ax pay er ac te d wi th reas on ab le cau se an d i n g oo d fa ith is m ad e o n acas e-b y -cas e b as is , tak in g i nt o a cco un t al l p ert in en t fa ct s an d ci rcu m st an ces .” Sec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. “ Gen eral ly, th e m os t im po rta ntfact oris th e ex te ntof t he tax pay er’s eff ort t o a ss es s the tax pa y er’s p ro pe r ta x l iabi li ty.” Id.

Pet it io ne rs di d n otrai se anaffi rm at iv e d efen se to th e se c. 66 62 (a) p en al ty 2 5 inth ei r pe ti ti on . Ordi na ril y , an a ffi rm at iv e d efen se no t p le ad ed“ is de em edto be waiv ed .” Gus ta fs on v. Co m mis si on er, 9 7 T.C. 8 5, 9 0 (1 99 1) . Becau se res po nd en t ha s n otob

jecte d, h owe ve r, an d b ecau se bo th parti es ad dr es s the de fen se inth ei r br ie fs , we wil l treatitas a n i ss ue tri edby im pl ie d c on se ntof the parti es un de r Ru le 41 (b )(1 ).- 82 -

[* 82 ] On b rie f, pe ti ti on ers co nt en d, g en eral ly, th atth ey ha ve sh own reas on ab le
cau se forth e und erp aym en t s etforth inth e n ot ic e o f de fic ie nc y . They as se rt t ha t th ey m ai nt ai ne d b oo ks an d re co rd s ad equa te to pro pe rly subs tant ia te CHMD’s
ex pe ns es an d e xe rci se d due care infil in g the ir t ax returns . On th e rec or d b efo re u s, we in te rp retth es e as se rti on s as refe ren ces to CHMD’s lo ss of d oc um en ts inth e 20 09 flo od
. 2 6

A tax pa y er m ay

est ab li sh a se c. 66 64 (c) re as on ab le cau se de fen se by 2 6 sh owi ng th athe or s he rel ie d re as on ab ly andingo odfai thon a th irdparty’ s ad vi ce intak in g the di sp ut edtax po si ti on . See s ec. 1 .66 64 -4 (c), In co m e Tax Reg s. We ha ve he ldth at , to est ab li sh th is varia ti on of t he de fen se , “ th e ta xp ay er m us t p ro ve * * * tha t * * * : (1 ) The advi se r was a co m pe te ntpro fes si on al who ha d s uf fic ie nt ex pe rti se to jus ti fy

rel ianc e, (2 ) th e ta xp ay er p ro vi de d n eces sa ry an d a ccu rat e in fo rm at io n t o the advi se r, an d (3 ) th e ta xp ay er ac tu al ly reli edingo odfai thon th e advi se r’s jud gm en t.” Se e Neo na to lo gy Asso cs ., P.A. v. Co m mis si on er, 1 15 T.C. 43 , 99 (20 00 ), aff’d, 2 99 F.3d22 1 (3 d C ir. 2 00 2) ; Ch arl ot te ’s Offic e Bo ut ique , In c. v. Co m

m is si on er, 4 25 F.3d12 03 , 12 12 & n .8 (9 th Cir . 20 05 ) (quo ti ng th reepr on g t es t i n Neo na to lo gy Asso cs . with app ro va l), a ff’g 1 21 T.C. 89 (20 03 ), supp le m en te d b y

T.C. Mem o. 2 00 4- 43
. Pet it io ne rs ha ve no t ra is eda reas on ab le rel ianc e d efen se , andth e rec or d wou ldno t s up po rt i t. Dr. Hol de n t es ti fie d tha t As hl ey Hall sm an , a cert ifi edpubl ic acco un tantwith Hal ls m anAcco un tanc y Co rp . who ha d p rep aredCHMD’s Fed eral in co m e ta x re tu rn s fo r atlea stfiv e y ears , pre pa redit s 2 00 7 re turn , as the tax return it se lf i nd ic at es . Evenass um in g, ar gu en do , th atMs . Hall sm an ’s cert ifi edpubl ic acco un tant(C.P.A.) cre de nt ia l an d fi ve or m or e y ears of e xp eri en ce re nd eredhe r a co m pe te ntpro fes si on al with s uf fic ie ntexpe rti se to jus ti fy rel ianc e, itis un cl ear wha t i nf orm at io n p et it io ne rs or C HMD’s st aff p ro vi de d t o h er o r whe th er pe ti ti on ers rel ie d i n g oo d fa ith upo n h er ad vi ce.- 83 -

[* 83 ] Pet it io ne rs est ab li sh edth atCHMD d idm ai nt ai n re co rd s o f it s ex pe ns es . Ms. Garci a en te redbi ll s i nt o Qu ic kb oo ks as p ay ab le s upo n re cei pt , up da te d the en tri es to refl ectpaym en t wh ensh e wro te ch eck s o r m ad e o nl in e p aym en ts , and
m ai nt ai ne d h ardco py reco rd s wi th an no ta ti on s i n v en do r-s pe ci fic fol de rs . An in de pe nd en t thi rdparty revi ewedan d v eri fie d quarte rly her cl as si fic at io ns of CHMD’s ex pe ns es withi n v ari ou s av ai labl e Qui ckbo ok s ca te go rie s. CHM D us eda pa yro ll pro ces si ng co m

pa ny, A DP, to pre pa re i ts payro ll ch eck s. Fo r eac h p ay pe rio d, M s. Garc iawou ldtel ep ho ne ADP to rep ort the ho ur s wo rk edby each
em pl oyee an d i nd ep en de ntco nt ract oron CHMD’s p ayro ll . ADP wou ldth en pr ep are a ndde li ve r th e p ayro ll ch eck s t o C HMD, to be si gn edan d the n d is bu rs ed to th e st aff. Pet it io ne rs furth er es tabl is he d tha t, o n o r aro un d Dec em be r 13 , 20 09 , a pi pe br ok e inth e are a o f th e Oran ge off ic e whe re Dr. Ho ld en ’s andMs . Garci a’s de sk s, Dr. Hol de n’s b oo ks , m ed ic al reco rd s, co m pu te rs , bi ll in g re co rd s, an d re co rd s o f CHMD’s d eb ts were l oc at ed . At th e reque stof Dr. Ho ld en ’s ban krup tc y tru st ee, Mr. Rh on do ha d e arl ie r pl aceddo cu m en ts an d h arddri ve s d et ai li ng th e p as t fi ve y ears of C HMD’s in co m e an d e xp en se s ag ai ns t a wal l o f Dr. Hol de n’s o ffi ce. The pi pe bro ke di rect ly abo ve , dre nc hi ng an d thu s d es tro y in g m an y of t he reco rd s.- 84 -

[* 84 ] On o th er fa ct s, we m ig htfin d tha t d es tru ct io n o f rec or ds ina fl oo d p ro vi de s
reas on ab le cau se forde fic ie ntsubs tant iati on . See, e.g ., Burka rt v . Comm is si on er, T.C. Mem o. 1 98 4- 42 9, 4 8 T.C.M . (CCH) 8 67 , 86 9 (1 98 4) (whe re the tax pa y ers
es tabl is he d tha t the ir b oo ks an d re co rd s wer e lo stina fl oo d, fi nd in g tha t the ta xp ay ers were n otli ab le forth e n eg li ge nc e p en al ty und er the pre de ces so r st atut e of sec ti on 66 62 ). Bu t s ee, e.g ., Nguy env. Co m mis si on er, T.C. Mem o. 2 01 4- 19 9, at *3 , *8 -* 11 (whe re the tax pa y er es tabl is he d tha t h e lo stbi ll s an d re cei pt s i n aflo od , ne ve rth el es s fi nd in g tha t the tax pa y er was li ab le forth e acc ur acy-rela te d p en al ty). W e d ecl in e to do so he re fo r atth ree r eas on s. Fi rs t, al th ou gh pe ti ti on ers di d m ak e so m e eff ort t o re co ns tru ctth ei r lo st
reco rd s, tha t ef

fo rt wa s h ap ha zard . On o ne hand , pet it io ne rs su cces sf ul ly
subs tant ia te d wi th sec on da ry ev id en ce m os t o f th e equi pm en t re nt al ex pe ns e cl ai m edon CHMD’s return. Onth e o th er h an d, p et it io ne rs ut te rly fail edto
subs tant ia te vario us ex pe ns es pa idwith c red itcard s as well as i nt eres t p ai d t o cred itcardpro vi de rs . The rec or d c on ta in s o nl y a si ng le pa ge fro m

a si ng le st at em en t fo r on e cre di t ca rd , whi chap pe ars to be Dr. Hol de n’s p ers on al card
. Pet it io ne rs di d n otretrie ve fro m Adv an ta , Am eri canExp res s, Pl at in um Plu s, o r an y ot he r cre di t ca rdpro vi de r rec or ds of C HMD’s pu rch as es . In ad di ti on ,- 85 -

[* 85 ] pe ti ti on ers off

eredno ex pl an at io n wh at so ev er fo r m or e th an$3 4,0 00 of rep orte d s al ari es an d wag e ex pe ns es . Seco nd , eve n h adCHMD’s co m pl et e b oo ks an d re co rd s b eenav ai labl e an d al l i ts rep orte d e xp en se s s ub st an ti at ed , so m e o f CHMD’s d educ ti on s wo ul d s ti ll ha ve be endi sa ll owe d. Fo r ex am pl e, pe ti ti on ers ’ own ev id en ce es tabl is he d tha t, o n atlea sttwo oc cas io ns , CHMD p ai d Dr. Ho ld en ’s car p aym en t. Ab se ntan y
ev id en ce tha t Dr. Ho ld enus edhi s v eh ic le stric tl y forwork -rel at edtra ve l (o th er th anco m m ut in g) , whi chon th e ex is ti ng reco rdwe fin d i m pl au si bl e, th es e
ex pe nd itur es were n otbu si ne ss ex pe ns es de du ct ib le un de r se ct io ns 16 2 and27 4( d)
. Thi rdan d fi na ll y , inde te rm in in g wh ethe r a t ax pa y er ac te d wi th reas on ab le
cau se an d i n g oo d fa ith, the pri nc ip al co ns id erat io n “ is th e ex te ntof the tax pa y er’s effo rt t o a ss es s the tax pa y er’s p ro pe r ta x l iabi li ty.” Sec. 1.6 66 4- 4( b) (1 ), In co m e Tax Reg s. Onth e rec or d b efo re u s, p et it io ne rs ap pe ar t o h av e m ad e v irtua ll y no
su cheffo rt. Dr. Ho ld entes ti fie d o nl y th athe rel ie d upo n aC.P.A. to pre pa re CHMD’s t ax returns . His s ta te m en ts rev eal eda su rp ris in g l ackof kno wled ge
co nc ern in g C HMD’s fin an ces an d t ax rep orti ng . Peti ti on ers off eredno ev id en ce th atth ey rev ie wedth e returns Ms . Hall sm anpre pa redor s tro ve to un de rs tand , eve n ata ve ry ge ne ral lev el , th e p os it io ns tak enth erei n.- 86 -

[* 86 ] Fo r th e fo reg oi ng reas on s, we co nc lu de th atpe ti ti on ers ha ve no t ca rri edth ei r bu rd enof e st ab li sh in g the reas on ab le cau se an d g oo d fa ith d efen se to th e se ct io n 66 62 (a) n eg li ge nc e (o r subs tant ia l u nd ers ta te m en t) p en al ty. Co ns eque nt ly, th e are li ab le forth e p en al ty w ith re sp ectto th e en ti rety of the ir und erp aym en t o f ta x, as
co m pu te d i n a cco rd an ce wi th th is op in io n. The Co urt h as co ns id eredall of t he parti es ’ co nt en ti on s, ar gu m en ts , reque st s,
an d s tate m en ts . To th e ex te ntno t d is cu ss edhe rei n, we co nc lu de th atth ey are
m eri tl es s, m oo t, o r irrel ev an t. To re fle ctth e fo reg oi ng , Decis io n wi ll be en te redun de r Ru le 15 5.- 87 -

[* 87 ] APPENDIX A Salary Pay ments Substanti ated by Ex. 18 -P Ex. 18 -P page N o. Chec k date Chec k N o. Payee Am ount Ex. 5-P page N o. Date post ed 1 4/ 6/ 20 07 60 8 Depinder Mann $3 ,5 00 .0 0 29 4/ 11 /2 00 7 2 4/ 20 /2 00 76 21 Depinder Mann 3, 50 0. 00 31 4/ 23 /2 00 7 3 3/ 23 /2 00 75 98 Depinder Mann 3, 50 0. 00 24 3/ 28 /2 00 7 4 3/ 9/ 20 07 58 8 Depinder Mann 3, 50 0. 00 22 3/ 14 /2 00 7 5 2/ 23 /2 00 75 77 Depinder Mann 3, 50 0. 00 19 3/ 2/ 20 07 6 2/ 9/ 20 07 56 6 Depinder Mann 3 ,5 00 .0 0 14 2/ 14 /2 00 7 7 1/ 26 /2 00 75 55 Depinder Mann 3 ,5 00 .0 0 9 1/ 30 /2 00 7 8 1/ 12 /2 00 75 43 Depinder Mann 3 ,5 00 .0 0 6 1/ 16 /2 00 7 2 8, 00 0. 00 9 1/ 26 /2 00 75 53 Edw ard M A ndujar 2 ,0 00 .0 0 9 1/ 29 /2 00 7 10 1/ 12 /2 00 75 41 Edw ard M A ndujar 2 ,0 00 .0 0 5 1/ 12 /2 00 7 4 ,0 00 .0 0 11 4/ 20 /2 00 76 20 Donna Do 60 2. 00 31 4/ 24 /2 00 7 12 4/ 6/ 20 07 60 7 Donna Do 6 46 .0 0 29 4/ 11 /2 00 7 13 2/ 9/ 20 07 56 5 Donna Do 1 ,1 18 .0 0 29 4/ 11 /2 00 7 14 3/ 23 /2 00 75 97 Donna Do 82 3. 20 29 4/ 11 /2 00 7 15 3/ 9/ 20 07 58 7 Donna Do 1 ,2 57 .6 0 29 4/ 11 /2 00 7 16 2/ 23 /2 00 75 76 Donna Do 1 ,4 05 .6 0 29 4/ 11 /2 00 7 17 1/ 26 /2 00 75 54 Donna Do 1 ,3 93 .6 0 21 3/ 9/ 20 07 18 1/ 12 /2 00 75 42 Donna Do 1 ,5 09 .2 0 14 2/ 12 /2 00 7 8 ,7 55 .2 0 19 1/ 12 /2 00 75 45 Ni npapha N iangnouansy 1 ,1 83 .1 4 6 1/ 16 /2 00 7 20 1/ 26 /2 00 75 57 Ni npapha N iangnouansy 1 ,4 40 .0 0 9 1/ 30 /2 00 7 21 DUP LI CA TE OF P AG E 2 0 22 2/ 9/ 20 07 56 8 Ni npapha N iangnouansy 1 ,8 55 .6 1 14 2/ 13 /2 00 7 23 2/ 23 /2 00 75 79 Ni npapha N iangnouansy 1 ,4 40 .0 0 19 3/ 2/ 20 07 24 3/ 9/ 20 07 59 0 Ni npapha N iangnouansy 1 ,4 40 .0 0 21 3/ 12 /2 00 7 25 3/ 23 /2 00 76 00 Ni npapha N iangnouansy 1 ,4 40 .0 0 24 3/ 28 /2 00 7 26 4/ 6/ 20 07 61 0 Ni npapha N iangnouansy 1 ,4 40 .0 0 29 4/ 10 /2 00 7 27 5/ 18 /2 00 76 31 Ni npapha N iangnouansy 1 ,4 40 .0 0 37 5/ 21 /2 00 7 28 6/ 15 /2 00 76 42 Ni npapha N iangnouansy 1 ,4 40 .0 0 44 6/ 20 /2 00 7 29 6/ 29 /2 00 76 48 Ni npapha N iangnouansy 1 ,6 00 .0 0 47 7/ 2/ 20 07- 88 -

[* 88 ] 30 7/ 13 /2 00 76 53 Ni npapha N iangnouansy 1 ,6 00 .0 0 49 7/ 16 /2 00 7 31 7/ 27 /2 00 76 58 Ni npapha N iangnouansy 1 ,6 00 .0 0 51 7/ 30 /2 00 7 32 8/ 10 /2 00 76 62 Ni npapha N iangnouansy 1 ,6 00 .0 0 54 8/ 14 /2 00 7 33 8/ 24 /2 00 76 67 Ni npapha N iangnouansy 1 ,6 00 .0 0 56 8/ 28 /2 00 7 34 9/ 7/ 20 07 67 1 Ni npapha N iangnouansy 1 ,6 00 .0 0 60 9/ 10 /2 00 7 35 9/ 21 /2 00 76 75 Ni npapha N iangnouansy 1 ,6 00 .0 0 62 9/ 25 /2 00 7 36 10 /5 /2 00 76 79 Ni npapha N iangnouansy 1 ,8 20 .0 0 65 10 /1 0/ 20 07 37 10 /1 9/ 20 07 68 3 Ni npapha N iangnouansy 1 ,6 00 .0 0 67 10 /2 3/ 20 07 38 11 /2 /2 00 76 87 Ni npapha N iangnouansy 1 ,6 00 .0 0 71 11 /6 /2 00 7 39 11 /1 6/ 20 07 69 1 Ni npapha N iangnouansy 1 ,6 00 .0 0 73 11 /2 1/ 20 07 40 11 /3 0/ 20 07 69 4 Ni npapha N iangnouansy 1 ,6 00 .0 0 76 12 /5 /2 00 7 41 12 /1 4/ 20 07 69 5 Ni npapha N iangnouansy 1 ,7 00 .0 0 78 12 /1 8/ 20 07 3 4, 23 8. 75 42 12 /2 9/ 20 06 52 8 Jennifer M. Ri ver a 35 9. 84 57 8/ 30 /2 00 7

TO TA L 7 5, 35 3. 79 Less 2 00 6 Item s -$3 59 .8 4 NE T TO TA L 74 ,9 93 .9 5- 89 -

[* 89 ] APPENDIX B Payments to Leasing Companies Identi fied in Exhib it 19-P Ex. 19-P page No. Date acc rued Payee Check No. Lease charge amoun t Ex. 11-P

page No. Fi nanc e charge amoun t Ex. 11-P

page No. Insur. amoun t Ex. 11-P

page No. Sal es tax amoun t Ex. 11-P

page No. Secu rity mon. amoun t Ex. 11-P

page No. Total payment Ex. 5-J

page No. Date cl eared 3 1/2/2007H PSC 8492 $711.33 24 $711.33 4 1/8/2007 1/2/2007GE / HPS C 8493 1,543.51 24 $119.62 53 2,508.61 1/2/2007GE / HPS C 8493 845.48 24 1 1/2/2007Lfg 55.30 24 55.30 2 1/2/2007 1 1/2/2007Mbf Leasing 91.14 24 91.14 2 1/2/2007 1 1/2/2007Mbf Leasing 91.14 24 91.14 2 1/2/2007 4 1/5/2007IF C Cr edit Corp. 8540 174.68 24 174.68 5 1/10/2007 5 1/5/2007IF C Cr edit Corp. 8541 43.57 24 43.57 5 1/10/2007 6 1/5/2007IF C Cr edit Corp. 8542 163.39 24 163.39 5 1/10/2007 1/22/2007Great Americ a 8570 327.56 24 $15.56 28 343.12 7 1/22/2007 1/26/2007GE / HPS C 8588 592.61 24 $99.00 31 691.61 9 1/26/2007 1/26/2007GE / HPS C 8589 1,543.51 24 119.62 53 2,508.61 9 1/26/2007 1/26/2007GE / HPS C 8589 845.48 24 1/26/2007GE / HPS C 8590 884.03 24 884.03 9 1/26/2007 1/26/2007H PSC 8591 2,730.77 24 2,730.77 9 1/26/2007 2 1/29/2007Protec tion One 8599 108.24 24 8.39 53 $77.61 194.24 9 1/29/2007 2 1/29/2007Protec tion One 8600 107.82 24 8.36 53 78.03 194.21 9 1/29/2007 7 2/1/2007Mbf Leasing 2090 91.14 24 91.14 12 2/1/2007 7 2/1/2007Mbf Leasing 2091 91.14 24 91.14 12 2/1/2007 7 2/2/2007Lfg 2092 55.30 24 55.30 12 2/2/2007- 90 -

[*90]

14 2/5/2007IF C Cr edit Corp. 2166 174.68 24 174.68 14 2/12/2007 15 2/5/2007IF C Cr edit Corp. 2167 163.39 24 163.39 14 2/12/2007 8 2/7/2007GE / HPS C 2147 1,543.51 24 154.35 31 119.62 53 2,747.51 14 2/13/2007 8 2/7/2007GE / HPS C 2147 845.48 25 84.55 31 9 2/7/2007GE / HPS C 2148 592.61 24 60.77 31 653.38 14 2/13/2007 10 2/7/2007GE / HPS C 2149 983.03 24 88.40 31 1,071.43 14 2/13/2007 11 2/7/2007H PSC 2150 1,308.95 24 1,308.95 14 2/13/2007 12 2/7/2007Great America 2153 288.63 24 288.63 14 2/13/2007 13 2/7/2007Great America 2154 263.50 25 263.50 14 2/13/2007 16 2/15/2007Ban c of Am erica 2201 537.68 25 35.02 $31.00 1,145.39 20 3/5/2007 16 2/15/2007Ban c of Am erica 2201 537.67 25 35.02 $31.00 17 2/16/2007Great Americ a 2204 327.56 25 15.56 28 343.12 19 3/2/2007 25 3/1/2007Mbf Leasing 91.14 25 91.14 19 3/1/2007 25 3/1/2007Mbf Leasing 91.14 25 91.14 19 3/1/2007 3/1/2007GE / HPS C 2235 983.03 25 99.63 31 1,082.66 20 3/6/2007 3/1/2007GE / HPS C 2236 1,543.51 25 156.67 31 119.62 53 2,751.10 20 3/6/2007 3/1/2007GE / HPS C 2237 493.61 25 50.40 31 544.01 20 3/6/2007 3/1/2007GE / HPS C 2236 845.48 25 85.82 31 25 3/2/2007Lfg 55.30 25 55.30 19 3/2/2007 21 3/3/2007Great America 2247 288.63 25 288.63 22 3/14/2007 20 3/3/2007Great America 2248 263.50 25 263.50 22 3/14/2007 18 3/8/2007IF C Cr edit Corp. 2258 210.48 25 210.48 21 3/12/2007 19 3/8/2007IF C Cr edit Corp. 2259 187.90 25 187.90 21 3/12/2007 23 3/15/2007Ban c of Am erica 2264 537.68 25 1,075.35 23 3/19/2007- 91 -

[*91]
23 3/15/2007Ban c of Am erica 2264 537.67 25 22 3/16/2007Great Americ a 2267 327.56 25 36.96 31 15.56 28 380.08 23 3/19/2007 24 3/31/2007Comp are

Busin ess Servi ces 2300 835.99 25 835.99 24 3/30/2007
28 4/2/2007IF C Cr edit Corp. 2308 210.48 25 210.48 28 4/6/2007 29 4/2/2007IF C Cr edit Corp. 2309 187.90 25 187.90 28 4/6/2007 34 4/2/2007Mbf Leasing 91.14 25 91.14 27 4/2/2007 34 4/2/2007Mbf Leasing 91.14 25 91.14 27 4/2/2007 34 4/2/2007Lfg 55.30 25 55.30 27 4/2/2007 27 4/4/2007GE / HPS C 2317 1,543.51 25 119.62 53 2,508.61 29 4/10/2007 27 4/4/2007GE / HPS C 2317 845.48 25 33 4/6/2007Great America 8613 288.63 25 288.63 28 4/6/2007 32 4/9/2007Great America 8620 263.50 25 263.50 29 4/9/2007 26 4/10/2007Protec tion One 2325 107.82 25 8.36 53 78.03 36 194.21 29 4/10/2007 30 4/10/2007GE / HPS C 2315 592.61 25 592.61 29 4/10/2007 31 4/10/2007GE / HPS C 2316 983.03 25 983.03 29 4/10/2007 4/16/2007Ban c of Am erica 8708 537.67 25 49.90 31 13.12 28 1,201.38 30 4/16/2007 4/16/2007Ban c of Am erica 8708 537.67 25 49.91 31 13.11 28 4/16/2007Great Americ a 8709 327.56 25 36.96 31 15.56 28 380.08 30 4/16/2007 5/1/2007GE / HPS C 8718 592.61 25 592.61 34 5/1/2007 5/1/2007GE / HPS C 8714 983.03 25 983.03 34 5/1/2007 5/1/2007GE / HPS C 8719 1,543.51 25 119.62 53 2,508.61 34 5/1/2007 35 5/1/2007Mbf Leasing 91.14 25 91.14 34 5/1/2007 35 5/1/2007Mbf Leasing 91.14 25 91.14 34 5/1/2007 5/1/2007GE / HPS C 8719 845.48 25 35 5/2/2007Lfg 55.30 25 55.30 34 5/2/2007 36 5/7/2007Great America 8614 288.63 25 288.63 35 5/7/2007- 92 -

[*92]
36 5/7/2007Great America 8621 263.50 25 263.50 35 5/7/2007 36 5/7/2007IF C Cr edit Corp. 8775 185.97 25 185.97 35 5/7/2007 36 5/7/2007IF C Cr edit Corp. 8776 163.39 25 163.39 35 5/7/2007 37 5/14/2007Protec tion One 8804 108.24 25 8.39 53 77.61 36 194.24 36 5/14/2007 43 5/15/2007Ban c of Am erica 8807 1,075.35 25 26.23 28 1,101.58 36 5/16/2007 38 5/18/2007Great Americ a 8769 350.81 26 350.81 37 5/18/2007 38 5/18/2007Great Americ a 8770 320.28 26 320.28 37 5/18/2007 38 5/21/2007Great Americ a 8648 327.56 26 15.56 28 343.12 37 5/21/2007 6/1/2007GE / HPS C 8761 1,543.51 26 119.62 53 2,508.61 42 6/7/2007 6/1/2007GE / HPS C 8760 983.03 26 983.03 42 6/7/2007 6/1/2007GE / HPS C 8762 592.61 26 592.61 42 6/7/2007 6/1/2007GE / HPS C 8761 845.48 26 39 6/4/2007Great America 8841 377.06 26 377.06 41 6/4/2007 39 6/4/2007Great America 8842 412.99 26 412.99 41 6/4/2007 39 6/4/2007Lfg 55.30 26 55.30 41 6/4/2007 40 6/7/2007Mbf Leasing 91.14 26 91.14 42 6/7/2007 40 6/7/2007Mbf Leasing 91.14 26 91.14 42 6/7/2007 40 6/8/2007Mbf Leasing 32.74 26 32.74 42 6/8/2007 40 6/8/2007Mbf Leasing 32.74 26 32.74 42 6/8/2007 41 6/11/2007IF C Cr edit

Corporatio n 8849 185.97 26 185.97 43 6/13/2007 42 6/11/2007IF C Cr edit Corp. 8850 163.39 26 163.39 43 6/13/2007 43 6/15/2007Ban c of Am erica 8809 1,075.35 26 26.23 28 1,101.58 43 6/18/2007 44 6/15/2007Great Americ a 8866 327.56 26 15.56 28 343.12 44 6/21/2007 7/2/2007Lfg 55.30 26 55.30 47 7/2/2007 7/2/2007Mbf Leasing 91.14 26 91.14 47 7/2/2007 7/2/2007Mbf Leasing 91.14 26 91.14 47 48 7/3/2007GE / HPS C 8858 1,543.51 26 119.62 53 2,508.61 48 7/10/2007- 93 -

[*93]

47 7/3/2007GE / HPS C 8857 983.03 26 983.03 48 7/10/2007 49 7/3/2007GE / HPS C 8859 592.61 26 592.61 48 7/10/2007 48 7/3/2007GE / HPS C 8858 845.48 26 46 7/5/2007IF C Cr edit Corp. 8893 210.48 26 210.48 48 7/6/2007 45 7/5/2007IF C Cr edit Corp. 8895 187.90 26 187.90 48 7/6/2007 7/6/2007Protec tion One 8915 108.24 26 8.39 53 77.61 36 194.24 48 7/6/2007 50 7/9/2007Great America 8619 288.63 26 288.63 48 7/10/2007 51 7/9/2007Great America 8623 263.50 26 263.50 48 7/10/2007 7/11/2007Protec tion One 8917 107.82 26 8.36 53 78.03 36 194.21 48 7/11/2007 52 7/16/2007Ban c of Am erica 8808 1,075.35 26 26.23 28 1,101.58 49 7/17/2007 53 7/16/2007Great Americ a 8933 327.56 26 73.92 32 15.56 28 417.04 49 7/19/2007 55 8/1/2007GE / HPS C 8924 983.03 26 983.03 53 8/2/2007 56 8/1/2007GE / HPS C 8926 1,543.51 26 119.62 53 2,508.61 53 8/2/2007 57 8/1/2007GE / HPS C 8928 592.61 26 592.61 53 8/2/2007 64 8/1/2007Mbf Leasing 91.14 26 91.14 52 8/1/2007 65 8/1/2007Mbf Leasing 91.14 26 91.14 53 8/1/2007 56 8/1/2007GE / HPS C 8926 845.48 26 65 8/2/2007Lfg 55.30 26 55.30 53 8/2/2007 58 8/3/2007IF C Cr edit Corp. 8973 163.39 26 163.39 54 8/8/2007 59 8/3/2007IF C Cr edit Corp. 8972 185.97 26 185.97 54 8/8/2007 65 8/3/2007GE / HPS C 149.00 26 149.00 53 8/2/2007 61 8/7/2007Great America 8617 288.63 26 288.63 55 8/14/2007 60 8/7/2007Great America 8625 263.50 26 263.50 55 8/14/2007 62 8/15/2007Ban c of Am erica 8810 1,075.35 26 26.23 28 1,101.58 55 8/16/2007- 94 -

[*94]
63 8/16/2007Great Americ a 8867 327.56 26 15.56 28 343.12 55 8/21/2007 70 9/4/2007GE / HPS C 8927 592.61 26 592.61 60 9/7/2007 66 9/4/2007Great America 8955 288.63 26 288.63 59 9/5/2007 67 9/4/2007Great America 8956 263.50 27 263.50 59 9/5/2007 71 9/4/2007GE / HPS C 8988 1,543.51 27 119.62 53 1,663.13 60 9/7/2007 83 9/4/2007Lfg 55.30 27 55.30 59 9/4/2007 83 9/4/2007Mbf Leasing 91.14 27 91.14 59 9/4/2007 83 9/4/2007Mbf Leasing 91.14 27 91.14 59 9/4/2007 69 9/5/2007IF C Cr edit Corp. 9072 185.97 27 185.97 59 9/6/2007 68 9/5/2007IF C Cr edit Corp. 9073 163.39 27 163.39 59 9/6/2007 72 9/14/2007Ban c of Am erica 8929 1,075.35 27 26.23 28 1,101.58 61 9/17/2007 73 9/14/2007Great Americ a 9105 327.56 27 36.96 32 15.56 28 380.08 61 9/24/2007 75 10/1/2007GE / HPS C 8982 592.61 27 592.61 64 10/2/2007 74 10/1/2007GE / HPS C 9083 1,543.51 27 119.62 53 1,663.13 64 10/2/2007 80 10/1/2007Mbf Leasing 91.14 27 91.14 64 10/1/2007 80 10/1/2007Mbf Leasing 91.14 27 91.14 64 10/1/2007 80 10/2/2007Lfg 55.30 27 55.30 64 10/2/2007 76 10/3/2007Great Americ a 9055 288.63 27 288.63 65 10/4/2007 77 10/3/2007Great Americ a 9058 263.50 27 263.50 65 10/4/2007 79 10/5/2007IF C Cr edit Corp. 9130 185.97 27 185.97 66 10/11/2007 78 10/5/2007IF C Cr edit Corp. 9129 163.39 27 163.39 66 10/11/2007 81 10/9/2007Protec tion One 9140 108.24 27 8.39 53 77.61 36 194.24 65 10/9/2007 82 10/11/2007Protec tion One 9141 107.82 27 8.36 53 78.03 37 194.21 66 10/11/2007 10/25/2007Great Americ a 2496 327.56 27 15.56 28 343.12 68 10/30/2007 85 11/1/2007GE / HPS C 2526 1,543.51 27 119.62 53 1,663.13 70 11/2/2007- 95 -

[*95]
84 11/1/2007GE / HPS C 2527 592.61 27 592.61 69 11/1/2007 93 11/1/2007Mbf Leasing 91.14 27 91.14 70 11/1/2007 93 11/1/2007Mbf Leasing 91.14 27 91.14 70 11/1/2007 93 11/2/2007Lfg 55.30 27 55.30 70 11/2/2007 11/5/2007IF C Cr edit Corp. 2548 185.97 27 185.97 70 11/5/2007 86 11/5/2007IF C Cr edit Corp. 2549 163.39 27 163.39 70 11/5/2007 88 11/15/2007Ban c of Am erica 2578 1,075.35 27 99.80 33 26.23 28 1,201.38 73 11/20/2007 87 11/15/2007Ban c of Am erica 2579 1,423.95 27 26.23 28 1,450.18 73 11/20/2007 89 11/26/2007Great Americ a 2580 268.88 27 31.12 28 300.00 73 11/26/2007 90 12/1/2007GE / HPS C 2614 592.61 27 592.61 74 11/30/2007 92 12/1/2007GE / HPS C 2615 1,663.13 27 1,663.13 74 11/30/2007 91 12/1/2007GE / HPS C 2616 1,290.80 27 1,290.80 74 11/30/2007 96 12/3/2007Great Americ a 2622 288.63 27 288.63 76 12/6/2007 97 12/3/2007Great Americ a 2623 263.50 27 263.50 76 12/6/2007 99 12/3/2007Lfg 55.30 27 55.30 76 12/3/2007 99 12/3/2007Mbf Leasing 91.14 27 91.14 76 12/3/2007 99 12/3/2007Mbf Leasing 91.14 27 91.14 76 12/3/2007 95 12/5/2007IF C Cr edit Corp. 2630 163.39 27 163.39 76 12/6/2007 94 12/5/2007IF C Cr edit Corp. 2631 185.97 27 185.97 76 12/6/2007 98 12/15/2007Ban c of Am erica 2654 1,075.35 27 99.80 33 26.23 28 1,201.38 78 12/18/2007 100 12/16/2007Great Americ a 2660 355.12 27 73.92 33 31.12 28 460.16 78 12/21/2007

Total Lease C harges: 80,247.37 Unsubstan tiated -$2,388.99 Total Sub stantiated : $77,858.38- 96 -

[* 96 ] APPENDIX C

Inter est and Finance C harge Paym ents i n Exhibi t 2 0-P

Ex. 20 -P page N o. Payee Chec k No. Chec k amount Date paid Inter est amount Date ac cr ued Ex. 11 -P

page N o. 76 Adv anta 22 97 $3 00 .0 0 4/ 2/ 20 07 $1 15 .8 6 3/ 29 /2 00 7 31 94 Adv anta 89 45 70 7. 00 8/ 1/ 20 07 30 2. 03 7/ 27 /2 00 7 32 10 1 Adv anta 90 31 50 0. 00 8/ 30 /2 00 7 31 5. 94 8/ 27 /2 00 7 32 11 4 Adv anta 25 04 54 0. 00 10 /3 0/ 20 07 41 5. 84 10 /2 9/ 20 07 32 12 4 Adv anta 25 88 1, 00 0. 00 11 /2 6/ 20 07 39 2. 53 11 /2 7/ 20 07 33 13 5 Adv anta 26 72 1, 00 0. 00 12 /2 8/ 20 07 43 1. 68 12 /2 9/ 20 07 33 28 Am eric an Expres s 2, 00 0. 00 1/ 22 /2 00 7 17 7. 29 1/ 22 /2 00 7 31 74 Am eric an Expres s 22 69 42 6. 18 3/ 19 /2 00 7 26 7. 90 3/ 17 /2 00 7 31 80 Am eric an Expres s 50 0. 00 4/ 13 /2 00 7 1. 73 4/ 13 /2 00 7 31 82 Am eric an Expres s 50 0. 00 5/ 7/ 20 07 16 5. 01 5/ 7/ 20 07 31 83 Am eric an Expres s 50 0. 00 5/ 14 /2 00 7 97 .2 3 5/ 14 /2 00 7 31 86 Am eric an Expres s 1, 00 0. 00 6/ 13 /2 00 7 10 4. 41 6/ 13 /2 00 7 32 89 Am eric an Expres s $5 00 .0 0 7/ 6/ 20 07 23 3. 07 7/ 6/ 20 07 32 91 Am eric an Expres s 1, 00 0. 00 7/ 13 /2 00 7 23 8. 80 7/ 13 /2 00 7 32 96 Am eric an Expres s 1, 00 0. 00 8/ 13 /2 00 7 29 9. 47 8/ 13 /2 00 7 32 10 2 Am eric an Expres s 50 0. 00 9/ 6/ 20 07 18 9. 50 9/ 6/ 20 07 32 10 4 Am eric an Expres s 1, 00 0. 00 9/ 13 /2 00 7 30 8. 31 9/ 13 /2 00 7 32 10 8 Am eric an Expres s 50 0. 00 10 /9 /2 00 7 17 9. 99 10 /9 /2 00 7 32 10 9 Am eric an Expres s 24 80 31 9. 00 10 /1 7/ 20 07 30 5. 10 10 /1 5/ 20 07 32 11 8 Am eric an Expres s 25 50 1, 58 9. 62 11 /5 /2 00 7 17 7. 60 11 /5 /2 00 7 32 12 1 Am eric an Expres s 25 71 1, 00 0. 00 11 /1 6/ 20 07 18 2. 88 11 /1 3/ 20 07 32 12 8 Am eric an Expres s 26 33 1, 00 0. 00 12 /4 /2 00 7 18 4. 33 12 /4 /2 00 7 33 13 0 Am eric an Expres s 26 53 1, 00 0. 00 12 /1 3/ 20 07 21 4. 34 12 /1 5/ 20 07 33 88 Am eric an Expres s 5. 95 7/ 3/ 20 07 80 Banc of A meri ca L easing 1, 20 1. 38 4/ 16 /2 00 7 99 .8 1 4/ 16 /2 00 7 31 12 5 Banc of A meri ca Leasi ng 25 78 1, 20 1. 38 11 /2 0/ 20 07 99 .8 0 11 /1 5/ 20 07 33 13 2 Banc of A meri ca L easing 26 54 1, 20 1. 38 12 /1 8/ 20 07 99 .8 0 12 /1 5/ 20 07 33 28 Bank of Am eric a 5, 00 0. 00 1/ 22 /2 00 7 46 8. 45 1/ 22 /2 00 7 31 34 Bank of Am eric a 21 88 30 0. 00 2/ 13 /2 00 7 50 .1 0 2/ 12 /2 00 7 31 67 Bank of Am eric a 22 07 1, 00 0. 00 2/ 26 /2 00 7 98 1. 68 2/ 18 /2 00 7 31 75 Bank of Am eric a 1, 00 0. 00 3/ 20 /2 00 7 1, 07 1. 85 3/ 20 /2 00 7 31 79 Bank of Am eric a 30 0. 00 4/ 10 /2 00 7 19 7. 71 4/ 10 /2 00 7 31- 97 -

[*97]
80 Bank of Am eric a 50 0. 00 4/ 13 /2 00 7 67 8. 48 4/ 13 /2 00 7 31 81 Bank of Am eric a 1, 00 0. 00 4/ 20 /2 00 7 97 2. 23 4/ 20 /2 00 7 31 86 Bank of Am eric a 1, 00 0. 00 6/ 13 /2 00 7 81 0. 04 6/ 13 /2 00 7 32 87 Bank of Am eric a 18 07 1, 00 0. 00 6/ 19 /2 00 7 1, 04 1. 16 6/ 19 /2 00 7 32 93 Bank of Am eric a 24 10 1, 00 0. 00 7/ 16 /2 00 7 83 8. 35 7/ 16 /2 00 7 32 99 Bank of Am eric a 24 11 86 2. 00 8/ 14 /2 00 7 1, 29 3. 69 8/ 13 /2 00 7 32 10 0 Bank of Am eric a 1, 00 0. 00 8/ 17 /2 00 7 1, 03 8. 89 8/ 17 /2 00 7 32 10 7 Bank of Am eric a 1, 00 0. 00 9/ 18 /2 00 7 94 5. 50 9/ 18 /2 00 7 32 11 1 Bank of Am eric a 24 93 86 2. 00 10 /2 4/ 20 07 41 .3 5 10 /2 3/ 20 07 32 11 3 Bank of Am eric a 24 95 1, 41 4. 41 10 /2 4/ 20 07 99 8. 20 10 /2 3/ 20 07 32 12 3 Bank of Am eric a 25 81 1, 36 7. 77 11 /1 9/ 20 07 99 8. 96 11 /1 8/ 20 07 33 85 Bank of Am eric a = Plat inum Plus 68 07 33 1. 00 6/ 11 /2 00 7 26 6. 56 6/ 11 /2 00 7 32 11 2 Bank of Am eric a = Plat inum Plus 24 94 18 0. 00 10 /2 4/ 20 07 18 0. 00 10 /2 3/ 20 07 32 10 5 BOU NC ED CH EC K 13 1 Bus iness C ard 26 61 1, 32 7. 80 12 /1 8/ 20 07 75 2. 33 12 /1 8/ 20 07 33 12 0 Bus iness C ard = Bank of Am eric a 25 11 86 2. 00 11 /9 /2 00 7 41 .4 8 11 /1 2/ 20 07 32 12 9 Bus iness C ard = Bank of Am eric a 26 38 86 2. 00 12 /1 0/ 20 07 37 .4 4 12 /1 1/ 20 07 33 77 Bus iness C ard = Plat inum Plus 23 18 23 0. 00 4/ 9/ 20 07 20 6. 39 4/ 3/ 20 07 31 11 6 Bus iness C ard = Plat inum Plus 25 07 50 0. 00 11 /1 /2 00 7 26 0. 99 11 /2 /2 00 7 32 11 7 Bus iness C ard = Plat inum Plus 25 40 10 0. 00 11 /3 /2 00 7 25 6. 24 11 /3 /2 00 7 32 12 6 Bus iness C ard = Plat inum Plus 26 25 50 0. 00 12 /3 /2 00 7 20 6. 00 12 /3 /2 00 7 33 3 Capit al One 21 51 1, 76 5. 26 2/ 12 /2 00 7 1, 03 6. 01 2/ 7/ 20 07 30 5 Capit al One 22 33 1, 76 5. 26 3/ 6/ 20 07 1, 03 6. 01 3/ 1/ 20 07 30 8 Capit al One 23 07 1, 76 5. 26 4/ 12 /2 00 7 95 9. 59 4/ 2/ 20 07 30 81 Capit al One 30 .0 0 4/ 20 /2 00 7 30 .0 0 4/ 20 /2 00 7 31 11 Capit al One 1, 76 5. 26 5/ 1/ 20 07 98 2. 27 5/ 1/ 20 07 30 16 Capit al One 1, 76 5. 26 7/ 2/ 20 07 96 3. 55 7/ 2/ 20 07 30 18 Capit al One 1, 76 5. 26 7/ 19 /2 00 7 99 1. 71 7/ 18 /2 00 7 30 19 Capit al One 1, 76 5. 26 8/ 1/ 20 07 1, 05 4. 97 8/ 1/ 20 07 30 20 Capit al One 1, 76 5. 26 8/ 31 /2 00 7 1, 01 9. 77 8/ 31 /2 00 7 30 11 0 Capit al One 24 85 10 5. 00 10 /2 3/ 20 07 4. 61 10 /2 2/ 20 07 32 23 Capit al One 25 30 1, 76 5. 26 11 /2 /2 00 7 89 4. 87 11 /1 /2 00 7 30 12 2 Capit al One 25 84 60 0. 00 11 /1 9/ 20 07 11 2. 69 11 /2 1/ 20 07 33- 98 -

[*98]
25 Capit al One 26 17 1, 76 5. 26 12 /3 /2 00 7 94 6. 17 12 /1 /2 00 7 30 13 3 Capit al One 26 58 1, 00 0. 00 12 /1 8/ 20 07 71 .2 5 12 /2 1/ 20 07 33 1 Chr is topher Hol den 21 22 58 3. 33 1/ 12 /2 00 7 58 3. 33 1/ 8/ 20 07 30 2 Com merc ial Loans D ebit 30 9. 10 2/ 6/ 20 07 30 9. 10 2/ 6/ 20 07 30 7 Com merc ial Loans D ebit 27 9. 18 3/ 6/ 20 07 27 9. 18 3/ 6/ 20 07 30 10 Com merc ial Loans D ebit 30 9. 10 4/ 6/ 20 07 30 9. 10 4/ 6/ 20 07 30 Ex. 5-J at 35 Com merc ial Loans D ebit 29 9. 13 5/ 7/ 20 07 29 9. 13 5/ 7/ 20 07 30 15 Com merc ial Loans D ebit 30 9. 09 6/ 6/ 20 07 30 9. 09 6/ 6/ 20 07 30 17 Com merc ial Loans D ebit 29 9. 13 7/ 6/ 20 07 29 9. 13 7/ 6/ 20 07 30 19 Com merc ial Loans D ebit 30 9. 10 8/ 6/ 20 07 30 9. 09 8/ 6/ 20 07 30 21 Com merc ial Loans D ebit 30 9. 09 9/ 6/ 20 07 30 9. 09 9/ 6/ 20 07 30 22 Com merc ial Loans D ebit 29 7. 44 10 /9 /2 00 7 29 7. 44 10 /9 /2 00 7 30 24 Com merc ial Loans D ebit 71 1. 16 11 /6 /2 00 7 29 8. 62 11 /6 /2 00 7 30 26 Com merc ial Loans D ebit 71 1. 16 12 /6 /2 00 7 28 4. 15 12 /6 /2 00 7 30 43 DUP LI CA TE OF P AG E 1 0 44 DUP LI CA TE OF P AG E 1 1 45 DUP LI CA TE OF P AG E 1 2 46 DUP LI CA TE OF P AG E 1 3 47 DUP LI CA TE OF P AG E 1 4 48 DUP LI CA TE OF P AG E 1 5 49 DUP LI CA TE OF P AG E 1 6 50 a DUP LI CA TE OF P AG E 1 7 50 b DUP LI CA TE OF P AG E 1 8 51 DUP LI CA TE OF P AG E 1 9 35 DUP LI CA TE OF P AG E 2 52 DUP LI CA TE OF P AG E 2 0 53 DUP LI CA TE OF P AG E 2 1 54 DUP LI CA TE OF P AG E 2 2 55 DUP LI CA TE OF P AG E 2 3 56 DUP LI CA TE OF P AG E 2 4 57 DUP LI CA TE OF P AG E 2 5 58 DUP LI CA TE OF P AG E 2 6- 99 -

[*99]
59 DUP LI CA TE OF P AG E 2 7 60 DUP LI CA TE OF P AG E 2 8 61 DUP LI CA TE OF P AG E 2 9 36 DUP LI CA TE OF P AG E 3 62 DUP LI CA TE OF P AG E 3 0 63 DUP LI CA TE OF P AG E 3 1 64 DUP LI CA TE OF P AG E 3 2 65 DUP LI CA TE OF P AG E 3 3 66 DUP LI CA TE OF P AG E 3 4 37 DUP LI CA TE OF P AG E 4 38 DUP LI CA TE OF P AG E 5 39 DUP LI CA TE OF P AG E 6 40 DUP LI CA TE OF P AG E 7 41 DUP LI CA TE OF P AG E 8 42 DUP LI CA TE OF P AG E 9 68 GE Healt hcare Financi al Serv ic es 22 36 2, 75 1. 10 3/ 6/ 20 07 24 2. 49 3/ 1/ 20 07 31 69 GE Healt hcare Financi al Serv ic es 22 37 54 4. 01 3/ 6/ 20 07 50 .4 0 3/ 1/ 20 07 31 70 GE Healt hcare Financi al Serv ic es 22 35 1, 08 2. 66 3/ 6/ 20 07 99 .6 3 3/ 1/ 20 07 31 73 Gr eat Am eric a Leasi ng C orp 22 67 38 0. 08 3/ 16 /2 00 7 36 .9 6 3/ 16 /2 00 7 31 80 Gr eat Am eric a Leasi ng Corp. 38 0. 08 4/ 16 /2 00 7 36 .9 6 4/ 16 /2 00 7 31 92 Gr eat Am eric a Leasi ng C orp 89 33 41 7. 04 7/ 16 /2 00 7 73 .9 2 7/ 16 /2 00 7 32 13 4 Gr eat Am eric a Leasi ng C orp 26 60 46 0. 16 12 /2 1/ 20 07 73 .9 2 12 /1 6/ 20 07 33 10 Gr eat Am eric a Leasi ng Corp. 28 8. 63 4/ 6/ 20 07 13 Gr eat Am eric a Leasi ng Corp. 29 9. 13 5/ 7/ 20 07 30 HPSC 21 47 2, 74 7. 51 2/ 13 /2 00 7 23 8. 90 2/ 7/ 20 07 31 31 HPSC 21 49 1, 07 1. 43 2/ 13 /2 00 7 88 .4 0 2/ 7/ 20 07 31 32 HPSC 21 48 65 3. 38 2/ 13 /2 00 7 60 .7 7 2/ 7/ 20 07 31 4 Jane Garc ia 21 81 20 8. 33 2/ 9/ 20 07 20 8. 33 2/ 9/ 20 07 30- 10 0 -

[*100]
6 Jane Garc ia 22 41 20 8. 33 3/ 5/ 20 07 20 8. 33 3/ 5/ 20 07 30 9 Jane Garc ia 23 05 16 6. 67 4/ 4/ 20 07 16 6. 67 4/ 6/ 20 07 30 12 Jane Garc ia 23 63 1, 00 0. 00 5/ 7/ 20 07 1, 00 0. 00 5/ 4/ 20 07 30 14 Jane Garc ia 23 83 1, 00 0. 00 6/ 7/ 20 07 1, 00 0. 00 6/ 5/ 20 07 30 84 Jane Garc ia 23 91 10 ,0 00 .0 0 6/ 8/ 20 07 14 .7 4 6/ 8/ 20 07 31 33 Marli n Leasi ng 21 84 1, 41 6. 93 2/ 16 /2 00 7 19 3. 91 2/ 9/ 20 07 31 71 Marli n Leasi ng 22 56 1, 58 6. 83 3/ 12 /2 00 7 19 3. 91 3/ 8/ 20 07 31 90 Marli n Leasi ng 89 19 25 3. 22 7/ 13 /2 00 7 25 3. 22 7/ 10 /2 00 7 32 98 Marli n Leasi ng 89 91 1, 45 2. 23 8/ 16 /2 00 7 19 3. 91 8/ 10 /2 00 7 32 10 3 Marli n Leasi ng 89 90 1, 45 2. 23 9/ 12 /2 00 7 19 3. 91 9/ 10 /2 00 7 32 11 9 Marli n Leasi ng 25 54 1, 64 6. 14 11 /9 /2 00 7 19 3. 91 11 /1 0/ 20 07 32 12 7 Marli n Leasi ng 26 19 3, 12 8. 27 12 /4 /2 00 7 20 0. 38 12 /4 /2 00 7 33 10 6 McKes son Medic al 90 94 97 9. 73 9/ 20 /2 00 7 97 9. 73 9/ 17 /2 00 7 32 11 5 McKes son Medic al 25 10 2, 03 6. 19 11 /2 /2 00 7 78 .7 0 11 /1 /2 00 7 32 27 Plat inum Plus 1, 00 0. 00 1/ 9/ 20 07 25 5. 32 1/ 5/ 20 07 31 29 Plat inum Plus 50 0. 00 2/ 13 /2 00 7 22 8. 67 2/ 5/ 20 07 31 72 Plat inum Plus 46 2. 00 3/ 15 /2 00 7 28 1. 25 3/ 15 /2 00 7 31 88 Plat inum Plus 81 3. 01 7/ 3/ 20 07 27 8. 93 7/ 3/ 20 07 32 95 Plat inum Plus 50 0. 00 8/ 3/ 20 07 21 7. 89 8/ 3/ 20 07 32 78 Popular Leasi ng 23 24 3, 17 8. 39 4/ 9/ 20 07 13 8. 60 4/ 6/ 20 07 31 97 Popular Leasi ng 89 66 3, 17 8. 39 8/ 8/ 20 07 13 8. 60 8/ 7/ 20 07 32 Item s on P &L Mis si ng f rom Ex. 20 -P
Subcategor y Date ac cr ued Payee Am ount Chec k N o. Ex. 5-P page N o. Date

posted Loan inter est 1/ 2/ 20 07 Capit al One $1 ,0 10 .2 1 85 36 Loan inter est 10 /1 /2 00 7C apital One 94 0. 22 91 18 Finance charg e 1/ 21 /2 00 7A dvanta 75 .0 7 55 84 Finance charg e 1/ 26 /2 00 7G E / HP SC 99 .0 0 Di r D ebit 9 1/ 26 /2 00 7 Finance charg e 2/ 15 /2 00 7B anc of A meri ca L easing 35 .0 2 22 01 20 3/ 5/ 20 07 Finance charg e 2/ 15 /2 00 7B anc of A meri ca L easing 35 .0 2 22 01 20 3/ 5/ 20 07 Finance charg e 2/ 27 /2 00 7A dvanta 62 .4 0 22 25 20 3/ 5/ 20 07 Finance charg e 2/ 28 /2 00 7P opular L easing 28 9. 93 22 28 20 3/ 5/ 20 07 Finance charg e 4/ 6/ 20 07 Popular Leasi ng 13 8. 60 23 24 29 4/ 9/ 20 07 Finance charg e 5/ 9/ 20 07 Bank of Am eric a 73 5. 79 23 67 36 5/ 11 /2 00 7 Finance charg e 5/ 18 /2 00 7A dvanta 32 8. 66 88 23- 10 1 -

[*101] Finance charg e 5/ 22 /2 00 7P lati num P lus 49 0. 29 23 74 38 5/ 23 /2 00 7 Finance charg e 6/ 5/ 20 07 Am eric an Expres s 18 3. 55 88 44 Finance charg e 6/ 8/ 20 07 Marli n Leasi ng 19 3. 91 88 61 43 6/ 13 /2 00 7 Finance charg e 6/ 29 /2 00 7A dvanta 29 6. 25 88 84 48 7/ 5/ 20 07 Finance charg e 7/ 18 /2 00 7B ank of Am eric a 1, 01 1. 96 88 71 Finance charg e 8/ 6/ 20 07 Am eric an Expres s 17 5. 05 Di r D ebit 54 8/ 6/ 20 07 Finance charg e 9/ 14 /2 00 7G reat A meri ca L easing 36 .9 6 91 05 61 9/ 24 /2 00 7 Finance charg e 9/ 28 /2 00 7A dvanta 94 9. 03 91 17 64 10 /2 /2 00 7 Finance charg e 10 /3 /2 00 7P lati num P lus 60 9. 07 90 60 Finance charg e 10 /1 0/ 20 07 Marli n Leasi ng 19 3. 91 91 45 Finance charg e 10 /1 2/ 20 07 Bank of Am eric a 43 .3 7 91 46 Finance charg e 11 /2 9/ 20 07 Pharm a Pac 26 .4 6 25 77 Marli n Leasi ng Fi nance C harges Ex. 1 4-P
Ex. 14 -P page N o. Date post ed Chec k N o. Ex. 5-J page N o. Date post ed Chec k amount Finance

charg e amount 19 3/ 12 /2 00 7 22 56 21 3/ 12 /2 00 7 $1 ,5 86 .8 3 $1 93 .9 1 19 6/ 14 /2 00 7 88 61 43 6/ 13 /2 00 7 1, 70 5. 45 19 3. 91 19 7/ 16 /2 00 7 89 18 49 7/ 13 /2 00 7 25 3. 22 19 3. 91 20 7/ 30 /2 00 7 19 3. 91 20 -21 11 /9 /2 00 7 25 54 71 11 /9 /2 00 7 1, 64 6. 14 19 3. 91 21 12 /5 /2 00 7 26 19 76 12 /4 /2 00 7 3, 12 8. 27 19 3. 91 T OT AL 1, 16 3. 46- 10 2 -

[*102] APPENDIX D Marli n Leasi ng P aym ents i n Exhibi t 1 4-J
Ex. 14 -P page N o. Date post ed Chec k N o. Ex. 5-J page N o. Date post ed Chec k amount "Lease"

charg e amount 19 1/ 2/ 20 07 Cas hN/ A N/ A $ 2, 86 0. 83 $2 ,5 86 .4 6 19 2/ 15 /2 00 7 21 84 15 2/ 16 /2 00 7 1, 41 6. 93 1, 29 2. 73 19 3/ 12 /2 00 7 22 56 21 3/ 12 /2 00 7 1, 58 6. 83 1, 29 2. 73 19 4/ 10 /2 00 7 62 95 01 77 29 4/ 10 /2 00 7 1, 39 2. 92 1, 29 2. 73 19 5/ 16 /2 00 7 86 67 36 5/ 16 /2 00 7 1, 39 2. 92 1, 29 2. 73 19 6/ 14 /2 00 7 88 61 43 6/ 13 /2 00 7 1, 70 5. 45 1, 29 2. 73 20 7/ 16 /2 00 7 86 68 49 7/ 16 /2 00 7 1, 39 2. 92 1, 29 2. 73 20 8/ 20 /2 00 7 89 91 55 8/ 16 /2 00 7 1, 45 2. 23 1, 29 2. 73 20 9/ 13 /2 00 7 89 90 60 9/ 12 /2 00 7 1, 45 2. 23 1, 29 2. 73 20 -21 11 /9 /2 00 7 25 54 71 11 /9 /2 00 7 1, 64 6. 14 1, 29 2. 73 21 12 /5 /2 00 7 26 19 76 12 /4 /2 00 7 3, 12 8. 27 2, 58 5. 46 TO TA L 16 ,8 06 .4 9
Paym ents t o Key Equipm ent Financ e Ex. 5-J page N o. Date post ed Am ount Note 2 1/ 2/ 20 07 $2 ,8 81 .4 2 Leasi ng Ser vi ces - D ES 21 3/ 12 /2 00 7 1, 37 8. 21 Chec k N o. only - does not spec ify Key 29 4/ 9/ 20 07 1, 37 8. 21 Chec k N o. only - does not spec ify Key 35 5/ 4/ 20 07 1, 37 8. 21 42 6/ 7/ 20 07 1, 37 8. 21 47 7/ 3/ 20 07 1, 37 8. 21 Chec k N o. only - does not spec ify Key 53 8/ 2/ 20 07 1, 37 8. 21 Chec k N o. only - does not spec ify Key 59 9/ 4/ 20 07 1, 37 8. 21 Chec k N o. only - does not spec ify Key 65 10 /9 /2 00 7 1, 37 8. 21 Chec k N o. only - does not spec ify Key 70 11 /5 /2 00 7 1, 37 8. 21 Chec k N o. only - does not spec ify Key 76 12 /5 /2 00 7 1, 37 8. 21 Chec k N o. only - does not spec ify Key TO TA L 16 ,6 63 .5 2