09-1955-ag 

Nathel v. Commissioner 

1 UNITED STATES COURT OF APPEALS 

2 

3 FOR THE SECOND CIRCUIT

4 

5 ____________________________________ 

6 

7 August Term, 2009 

8 

9 (Argued: February 3, 2010 Decided: June 2, 2010) 

10 

11 Docket No. 09-1955-ag 

12 ____________________________________ 

13 

14 IRA NATHEL, TRACY NATHEL, SHELDON NATHEL, ANN M. NATHEL, 

15 

16 Petitioners-Appellants, 

17 

18 —v.— 

19 

20 COMMISSIONER OF INTERNAL REVENUE, 

21 

22 Respondent-Appellee. 

23 

24 ____________________________________ 

25 

26 Before: KATZMANN and RAGGI, Circuit Judges, and KOELTL, District 

Judge.* 27 

28 ____________________________________ 

29 

30 The petitioners appeal a decision of the United States Tax 

31 Court (Stephen J. Swift, Judge) finding that capital 

32 contributions they made to two S corporations could not be 

33 treated as “tax-exempt income” to the corporations for the 

34 purpose of increasing, pursuant to 26 U.S.C. § 1367(b)(2)(B), 

35 the petitioners’ bases in loans they made to the corporations. 

36 The Tax Court also found that the petitioners could not deduct 

 *

 The Honorable John G. Koeltl, of the United States District Court for 

the Southern District of New York, sitting by designation. 
-2-

1 their capital contributions as ordinary losses incurred in a 

2 trade or business pursuant to 26 U.S.C. § 165(c)(1) or incurred 

3 in a transaction entered into for profit pursuant to 

4 § 165(c)(2). We affirm. 

5 _________________________ 

6 

7 HUGH JANOW, Pearl River, NY, for Petitioners8 Appellants. 

9 

10 TERESA T. MILTON, Attorney (John A. DiCicco, 

11 Acting Assistant Attorney General, 

12 Steven Parks, Attorney, on the brief), 

13 Tax Division, United States Department 

14 of Justice, Washington, DC, for 

15 Respondent-Appellee. 

16 

17 _________________________
-3-

1 JOHN G. KOELTL, District Judge: 

2 The petitioners, Ira and Tracy Nathel and Sheldon and Ann 

3 M. Nathel, appeal a decision of the United States Tax Court 

4 (Stephen J. Swift, Judge) upholding tax deficiencies assessed 

5 by the Commissioner of Internal Revenue (the “Commissioner”). 

6 On appeal, the petitioners argue that certain capital 

7 contributions they made to two S corporations, of which they 

8 were shareholders, should be treated as items of “tax-exempt 

9 income” to the corporations for the purpose of restoring, 

10 pursuant to 26 U.S.C. § 1367(b)(2)(B), the petitioners’ 

11 previously reduced bases in loans they made to the 

12 corporations. The petitioners contend that as a result of 

13 their restored bases, they received no ordinary income when 

14 the S corporations repaid the petitioners’ loans. 

15 Alternatively, the petitioners argue that because they made 

16 the capital contributions to obtain releases from personal 

17 loan guarantees made to one of the corporations, the capital 

18 contributions should be deductible as ordinary losses incurred 

19 in a transaction entered into for profit pursuant to 26 U.S.C. 

20 § 165(c)(2). 

21 We conclude that the petitioners’ capital contributions 

22 do not constitute “tax-exempt income” to the S corporations 

23 and, therefore, that the petitioners are not entitled to 

24 increase their bases in their loans. We also conclude that 
-4-

1 because the petitioners have not met their burden of showing 

2 that the primary purpose of their capital contributions was to 

3 obtain releases from their loan guarantees, the petitioners 

4 are not entitled to deductions from ordinary income pursuant 

5 to § 165(c)(2). Therefore, we affirm the Tax Court’s 

6 decision. 

7 BACKGROUND 

8 The following facts are based on stipulated facts that 

9 the parties submitted to the Tax Court. 

 Ira and Sheldon Nathel1 10 (the “Nathels”) are brothers who, 

11 along with Gary Wishnatzki, organized three corporations that 

12 elected to be taxed under Subchapter S of the Internal Revenue 

13 Code (the “Code”), 26 U.S.C. §§ 1361–1379. “Subchapter S 

14 allows shareholders of qualified corporations to elect a 

15 ‘pass-through’ taxation system under which income is subjected 

16 to only one level of taxation.” Gitlitz v. Comm’r, 531 U.S. 

17 206, 209 (2001) (citing Bufferd v. Comm’r, 506 U.S. 523, 525 

18 (1993)). S corporation profits are not taxed on the corporate 

19 level; instead, they are passed through as taxable income to 

20 shareholders on a pro rata basis. 26 U.S.C. § 1366(a)(1)(A); 

21 see also Gitlitz, 531 U.S. at 209. 

22 In addition to profits, an S corporation shareholder is 

23 also taxed on any gain from the shareholder’s sale of 

 1

 Ira and Sheldon Nathel filed joint tax returns with their wives, 

who are also petitioners in this case. 
-5-

1 S corporation stock, which gain is calculated as the amount 

2 realized from the sale in excess of the shareholder’s basis in 

3 the stock. See 26 U.S.C. § 1001(a); Craven v. United States, 

4 215 F.3d 1201, 1204 (11th Cir. 2000). A shareholder’s basis 

5 in stock is generally the price paid for the stock if 

6 purchased from a third party or the amount of the 

7 shareholder’s capital contributions if the stock is received 

8 in exchange for capital contributions. 26 U.S.C. § 1012; 

9 Treas. Reg. § 1.118–1 (1960). 

10 Because S corporation profits are passed on to 

11 shareholders to be taxed at the individual level, to avoid the 

12 double taxation of a corporation’s profits, the Code permits 

13 shareholders to increase their bases in a corporation’s stock 

14 when the corporation receives certain “items of income 

15 described” in § 1366(a)(1)(A). § 1367(a)(1)(A); Gitlitz, 531 

16 U.S. at 209. Similarly, any losses or deductions that are 

17 passed through from an S corporation to shareholders reduce 

18 the shareholders’ bases in stock in order to prevent the 

19 double deduction of those items. § 1367(a)(2)(B); Gitlitz, 

20 531 U.S. at 209. If the deductions passed through by the 

21 corporation to a shareholder exceed a given shareholder’s 

22 remaining basis in stock in any tax year, the excess 

23 deductions are applied to reduce the shareholder’s basis in 

24 any indebtedness owed by the S corporation to the 
-6-

shareholder.2 1 § 1367(b)(2)(A). If the shareholder’s basis in 

2 indebtedness was so reduced, any net increase in basis in a 

3 subsequent tax year, as determined pursuant to 

4 §§ 1367(a)(1)(A) and 1366(a)(1)(A), is first applied to 

5 restore the shareholder’s basis in indebtedness before it is 

6 applied to restore the shareholder’s basis in stock. 

7 § 1367(b)(2)(B). 

8 The three S corporations in this case, Wishnatzki & 

9 Nathel, Inc. (“W & N New York”), G & D Farms, Inc. (“G & D 

10 Farms”), and Wishnatzki & Nathel of California, Inc. (“W & N 

11 California”), were organized to operate food distribution 

12 businesses in New York, Florida, and California. The Nathels 

13 each owned twenty-five percent of the corporations and Mr. 

14 Wishnatzki owned fifty percent. 

15 In June 1999, the Nathels and Mr. Wishnatzki personally 

16 guaranteed $2.5 million in loans made by two banks to G & D 

17 Farms. In December 2000, Ira and Sheldon Nathel each made 

18 personal loans in the amount of $649,775 to G & D Farms. 

19 As of December 31, 2000, the Nathels each had a zero basis in 

20 their G & D Farms and W & N California stock. They each had a 

 2

 An S corporation shareholder typically would not be entitled to a 

deduction upon making a loan to an S corporation and would not include in 

income any repayment of the principal by the corporation to the extent it 

is less than or equal to the shareholder’s basis in the loan. See Nat’l 

Bank of Commerce of Seattle v. Comm’r, 115 F.2d 875, 876 (9th Cir. 1940) 

(finding that repayment of money lent is not income). The shareholder’s 

basis in the loan would equal the amount of the original principal, 

subject to any subsequent adjustments to basis. See § 1012; 

§ 1366(d)(1)(B). 
-7-

1 basis of $112,547 in loans they made to G & D Farms and a 

2 basis of $3,603 in loans made to W & N California. 

3 In February 2001, G & D Farms repaid the Nathels’ 

4 December 2000 personal loans in the full amount of $649,775 

5 each. In August 2001, the Nathels and Mr. Wishnatzki agreed 

6 to a plan to liquidate W & N California and to convey full 

7 ownership of G & D Farms to Mr. Wishnatzki and full ownership 

8 of W & N New York to the Nathels. Prior to its liquidation, 

9 W & N California repaid outstanding loans to the Nathels in 

10 the amount of $161,250 each. The Nathels then made capital 

11 contributions to W & N California in the amount of $181,396 

12 each. The Nathels also made capital contributions to G & D 

13 Farms in the amount of $537,228 each. In the parties’ 

14 stipulation before the Tax Court, they indicated that the 

15 capital contributions to G & D Farms “were made by the Nathels 

16 to secure the release of their respective guarantees of [G & D 

17 Farms’] debts to the Banks and to obtain [Mr. Wishnatzki’s] 

18 agreement to the release of the Nathels from their guarantees 

19 and to the reorganization plan.” (Stipulation of Facts 

20 (“Stip.”) ¶ 34.) The parties also stipulated that “[a]s a 

21 condition for releasing Sheldon and Ira from their guarantees 

22 of [G & D Farms’] debt, the Banks and [Mr. Wishnatzki] 

23 required Sheldon and Ira to each contribute to [G & D Farms] 

24 additional capital in the amount of $537,228.00.” (Stip. 
-8-

1 ¶ 26.) In sum, in 2001, the Nathels received a combined 

2 $1,622,050 in loan repayments from the two corporations and 

3 made a combined total of $1,437,248 in capital contributions. 

4 In calculating their 2001 taxes, the Nathels treated 

5 their capital contributions to G & D Farms and W & N 

6 California as constituting “tax-exempt income” to the 

7 corporations for the purposes of § 1366(a)(1)(A). Therefore, 

8 because the Nathels’ bases in their stock previously had been 

9 reduced to zero and because their bases in the loans they made 

10 to the corporations were also reduced, the Nathels used their 

11 capital contributions to restore their bases in the loans 

12 pursuant to § 1367(b)(2)(B). Without such an increase in 

13 their bases, the petitioners would have been taxed on the 

14 ordinary income that would have resulted from the 

15 corporations’ repayment of the petitioners’ loans in amounts 

16 above the petitioners’ previously reduced bases. 

17 The Commissioner rejected the Nathels’ treatment of the 

18 capital contributions. The Commissioner determined that the 

19 Nathels’ capital contributions could not be used to offset the 

20 ordinary income that resulted from the amount of the 

21 corporations’ repayment of the Nathels’ loans above the 

22 Nathels’ then-existing bases in the loans. Instead, the 

23 Commissioner determined that the capital contributions 

24 increased the petitioners’ bases in their G & D Farms and 
-9-

1 W & N California stock. Because the petitioners redeemed 

2 their stock as part of the reorganization plan, the 

3 Commissioner determined that they were entitled to a long-term 

4 capital loss in light of their now-increased bases in the 

5 stock. The net effect of the Commissioner’s calculation was 

6 an increase in the tax owed by the Nathels in 2001. 

7 The Commissioner mailed a notice of deficiency dated June 

8 21, 2006, to Ira and Tracy Nathel, indicating that they owed 

9 an additional $279,847 in income taxes for 2001. The 

10 Commissioner also mailed a notice of deficiency dated June 21, 

11 2006, to Sheldon and Ann M. Nathel, indicating that they owed 

12 an additional $279,722. Both couples filed a timely petition 

13 in the Tax Court for a redetermination of the deficiencies. 

14 The Tax Court granted the parties’ joint motion to consolidate 

15 the cases. In an opinion dated December 17, 2008, the Tax 

16 Court rejected the petitioners’ challenges to the deficiencies 

determined by the Commissioner.3 17 Nathel v. Comm’r, 131 T.C. 

18 262 (2008). 

19 

20 

21 

 3

 In addition to the arguments raised on appeal, the petitioners 

argued in the Tax Court that their capital contributions were deductible 

as ordinary losses incurred in a trade or business pursuant to 

§ 165(c)(1). The Tax Court rejected that argument and the petitioners 

have abandoned it on appeal. 
-10-

1 DISCUSSION 

2 I 

3 We accept the stipulated facts the parties submitted to 

4 the Tax Court. We review the Tax Court’s legal conclusions de 

5 novo. Reimels v. Comm’r, 436 F.3d 344, 346 (2d Cir. 2006). 

6 II 

7 The petitioners’ argument that their capital 

8 contributions can be used to increase the bases of their loans 

9 to the corporations begins with the Code. Section 

10 1367(b)(2)(B) allows taxpayers to restore any basis in 

11 indebtedness that was reduced in a prior tax year if there is 

12 any “net increase” in basis in a subsequent tax year pursuant 

13 to § 1367(a)(1)(A). Section 1367(a)(1)(A), in turn, provides 

14 that a shareholder’s basis is increased by a corporation’s 

15 receipt of “the items of income described in” § 1366(a)(1)(A). 

16 Section 1366(a)(1)(A) provides that a shareholder’s pro rata 

17 share of a corporation’s “items of income (including tax18 exempt income),” among other things, should be taken into 

19 account in calculating an S corporation shareholder’s tax. 

20 The petitioners make the novel argument that capital 

21 contributions constitute “items of income (including tax22 exempt income)” for the purposes of § 1366(a)(1)(A). They 

23 make this argument despite 26 U.S.C. § 118(a), which provides 

24 that “[i]n the case of a corporation, gross income does not 
-11-

1 include any contribution to the capital of the taxpayer.” 

2 They argue that capital contributions are income, although 

3 tax-exempt income. 

4 We are aware of no case that has decided whether capital 

5 contributions constitute “items of income (including tax6 exempt income)” for the purposes of § 1366(a)(1)(A). However, 

7 while the question whether “income” in § 1366(a)(1)(A) 

8 includes capital contributions has not been resolved, courts 

9 frequently have addressed the scope of “income” as used in 26 

U.S.C. § 61(a) and in the Sixteenth Amendment.4 10 Those cases 

11 indicate that capital contributions traditionally are not 

12 considered to be “income” and, therefore, should not be 

13 considered “items of income” under § 1366(a)(1)(A). 

14 In determining whether capital contributions constitute 

15 “items of income (including tax-exempt income),” we look first 

 4

 Section 61(a) of the Code states: “Except as otherwise provided in 

this subtitle, gross income means all income from whatever source derived 

. . . .” 

The Sixteenth Amendment allows Congress to “lay and collect Taxes on 

incomes, from whatever source derived, without apportionment among the 

several States.” See also U.S. Const. art. I, § 2, cl. 3 (“[D]irect Taxes 

shall be apportioned among the several States which may be included within 

this Union, according to their respective Numbers . . . .”); U.S. Const. 

art. I, § 9, cl. 4 (“No Capitation, or other direct, Tax shall be laid, 

unless in Proportion to the Census or Enumeration herein before directed 

to be taken.”). 

It should be noted that “gross income” in § 61(a) is at least as 

broad as the meaning of “incomes” in the Sixteenth Amendment. See Murphy 

v. IRS, 493 F.3d 170, 176, 178-79 (D.C. Cir. 2007). The petitioners have 

not suggested that the definition of “income” for purposes of 

§ 1366(a)(1)(A) should be broader than the meaning of “incomes” under the 

Sixteenth Amendment, and we therefore find cases interpreting both 

“income” under § 61(a) and “incomes” under the Sixteenth Amendment to be 

instructive. 
-12-

1 to the traditional distinction between income and capital. In 

2 Eisner v. Macomber, 252 U.S. 189, 219 (1920), the Supreme 

3 Court determined that a shareholder’s receipt of a stock 

4 distribution was not income to the shareholder and, therefore, 

5 Congress’s attempt to tax the stock dividend was not 

6 authorized by the Sixteenth Amendment. Rejecting the argument 

7 that the shareholder could be taxed on the corporation’s 

underlying accumulated profits,5 8 the Court stated that 

9 “enrichment through increase in value of capital investment is 

10 not income in any proper meaning of the term.” Id. at 214-15. 

11 The Court drew a clear distinction between income and capital, 

12 defining income as “the gain derived from capital, from labor, 

13 or from both combined.” Id. at 207 (internal quotation marks 

14 omitted). 

15 Consistent with this definition, in Edwards v. Cuba 

16 Railroad Co., 268 U.S. 628, 632-33 (1925), the Supreme Court 

17 found that subsidy payments from the Cuban government to the 

18 defendant railroad company were reimbursements for “capital 

19 expenditures” and were not profits or gains to the 

20 corporation, and, therefore, were not income for purposes of 

21 the Sixteenth Amendment. An early case by this Court 

 5

 The Court noted that a shareholder’s share of a corporation’s 

accumulated profits could be taxed, but such taxation would be the 

taxation of property because of ownership, not income, and would require 

apportionment under Article I, section 2, clause 3 and Article I, section 

9, clause 4 of the Constitution. Macomber, 252 U.S. at 217; see also

n. 4, supra.
-13-

1 similarly distinguished income from capital. In United States 

2 v. Oregon-Washington Railroad & Navigation Co., 251 F. 211, 

3 213 (2d Cir. 1918), Judge Learned Hand noted that the Code’s 

4 use of “income” “unquestionably imports . . . the current 

5 distinction between what is commonly treated as the increase 

6 or increment from the exercise of some economically productive 

power . . . and the power itself.”6 7 Judge Hand stated that 

8 “income” “should not include such wealth as is honestly 

9 appropriated to what would customarily be regarded as the 

10 capital of the corporation taxed.” Id.

11 Macomber’s limited definition of income was expanded in 

12 United States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931) 

13 (finding that discharge of indebtedness caused the corporation 

14 taxpayer to realize an “accession to income” and was taxable 

15 under the Code). Subsequently, in Commissioner v. Glenshaw 

16 Glass Co., 348 U.S. 426, 431 (1955), the Supreme Court adopted 

17 a broad definition of income as “instances of undeniable 

18 accessions to wealth, clearly realized, and over which the 

19 taxpayers have complete dominion.” In Glenshaw Glass, the 

20 Supreme Court held that a punitive damages award was taxable 

 6

 Oregon-Washington’s holding, that discharge of indebtedness that 

was “a means of contribution to [the corporation’s] capital account” did 

not constitute taxable income to the corporation, Oregon-Washington, 251 

F. at 213, was later abrogated by 26 U.S.C. § 108(e)(6), which provides a 

mechanism for taxing discharge of indebtedness that was acquired by a 

corporation from a shareholder as a capital contribution. We address the 

petitioners’ argument that § 108(e)(6) demonstrates that capital 

contributions constitute “items of income” for the purposes of 

§ 1366(a)(1)(A) below. 
-14-

1 because it was included in the definition of “gross income” 

2 under the Code. Id. at 432-33. The Court found that through 

3 its then-existing definition of gross income as “income 

4 derived from any source whatever,” Congress intended “to exert 

5 in this field ‘the full measure of its taxing power’” and thus 

6 to tax “all gains except those specifically exempted” by the 

7 Code. Id. at 429-30 (quoting Helvering v. Clifford, 309 U.S. 

8 331, 334 (1940)); see also Collins v. Comm’r, 3 F.3d 625, 630 

9 (2d Cir. 1993). The Court distinguished the narrow definition 

10 of income in Macomber, but in doing so, it was careful to 

11 maintain the distinction between capital and income: 

12 Nor can we accept respondents’ 

13 contention that a narrower reading of [the 

14 predecessor of § 61(a)] is required by the 

15 Court’s characterization of income in 

16 [Macomber], as “the gain derived from 

17 capital, from labor, or from both 

18 combined.” The Court was there 

19 endeavoring to determine whether the 

20 distribution of a corporate stock dividend 

21 constituted a realized gain to the 

22 shareholder, or changed ‘only the form, 

23 not the essence,’ of his capital 

24 investment. It was held that the taxpayer 

25 had ‘received nothing out of the company’s 

26 assets for his separate use and benefit.’ 

27 The distribution, therefore, was held not 

28 a taxable event. In that context—

29 distinguishing gain from capital—the

30 definition served a useful purpose. But 

31 it was not meant to provide a touchstone 

32 to all future gross income questions. 

33 

34 Glenshaw Glass, 348 U.S. at 430-31 (emphasis added) (citations 

35 omitted). 
-15-

1 Congress has specifically recognized that capital 

2 contributions are not income. In 1954, Congress enacted 

3 § 118(a) of the Code, which provides that, “[i]n the case of a 

4 corporation, gross income does not include any contribution to 

5 the capital of the taxpayer.” Internal Revenue Code of 1954, 

6 Pub. L. No. 83-591, ch. 736, § 118(a), 68A Stat. 3, 39. The 

7 legislative history of § 118(a) indicates that the purpose of 

8 that section was to codify pre-1954 court decisions holding 

9 that certain payments to corporations by nonshareholders 

10 should be treated as capital contributions and not as income 

11 to the corporations, just as shareholder contributions were 

12 not treated as income to the corporations. See H.R. Rep. No. 

13 83-1337, at 17 (1954), reprinted in 1954 U.S.C.C.A.N. 4017, 

14 4042 (noting that § 118(a) “in effect places in the [C]ode the 

15 court decisions” on the subject of contributions from 

16 “individuals having no proprietary interest in the 

17 corporation”); S. Rep. No. 83-1622, at 18 (1954), reprinted in

18 1954 U.S.C.C.A.N. 4621, 4648 (same). While not explicitly 

19 listed, the legislative history most likely referred to 

20 several Supreme Court cases delineating the boundaries of 

21 capital contributions as distinguished from taxable income. 

22 Compare Brown Shoe Co. v. Comm’r, 339 U.S. 583, 591 (1950) 

23 (holding that payments to entice the location of a 

24 corporation’s factories in certain communities were nontaxable 
-16-

1 capital contributions), with Detroit Edison Co. v. Comm’r, 319 

2 U.S. 98, 102-03 (1943) (holding that payments from an electric 

3 company’s customers were not contributions to capital) and

4 Texas & Pac. Ry. Co. v. United States, 286 U.S. 285, 289-90 

5 (1932) (finding that government subsidies to guarantee a 

6 railroad a minimum revenue were not contributions to capital). 

7 In 1960, the Internal Revenue Service (“I.R.S.”) 

8 promulgated Treasury Regulation section 1.118-1, which notes 

9 that § 118(a) applies to capital contributions from both 

10 shareholders and nonshareholders. The Regulation provides 

11 that “voluntary pro rata payments” to a corporation from its 

12 shareholders for the purposes of providing “additional funds 

13 for conducting [the corporation’s] business . . . do not 

14 constitute income” to the corporation. Treas. Reg. § 1.118-1. 

15 This Regulation is entitled to deference by this Court and is 

16 fatal to the petitioners’ position. See McNamee v. Dep’t of 

17 Treasury, 488 F.3d 100, 106 (2d Cir. 2007) (“Because Congress 

18 has delegated to the Commissioner the power to promulgate all 

19 needful rules and regulations for the enforcement of [the 

20 Code], we must defer to his regulatory interpretations of the 

21 Code so long as they are reasonable.” (internal quotation 

22 marks and citation omitted)); United States v. Mazza-Alaluf, 

23 607 F. Supp. 2d 484, 496 (S.D.N.Y. 2009) (“Chevron deference 
-17-

1 is warranted for Treasury regulations passed under the 

2 authority delegated to it by Congress.”). 

3 The petitioners’ argument that capital contributions 

4 constitute “tax-exempt income,” despite the traditional 

5 treatment of capital contributions as distinct from income, is 

6 centered on the relatively recent Gitlitz case. In Gitlitz, 

7 the petitioners were shareholders of an insolvent 

8 S corporation that realized a discharge of indebtedness. 531 

9 U.S. at 210. The S corporation excluded the discharge of 

10 indebtedness amount from taxable income pursuant to 26 U.S.C. 

11 § 108(a)(1)(B) and (d)(7)(A), which excludes discharge of 

12 indebtedness from gross income if the taxpayer is insolvent. 

13 Id. The petitioners then increased their bases in the 

14 corporation’s stock by their pro rata share of the discharge 

15 of indebtedness under the theory that it was an “item of 

16 income [including tax-exempt income],” to the corporation 

17 pursuant to § 1366(a)(1)(A). Id. The Commissioner contended 

18 that the Code’s exclusion of discharge of indebtedness from 

19 the gross income of insolvent taxpayers meant that the 

20 discharge of indebtedness at issue was no longer an “item of 

21 income” for the purposes of § 1366(a)(1)(A) and could not be 

22 used to increase the petitioners’ bases. Id. at 213. 

23 The Supreme Court upheld the taxpayers’ treatment of the 

24 discharge of indebtedness, holding that § 108(a)’s exclusion 
-18-

1 of certain discharge of indebtedness income from gross income 

2 does not change its fundamental character as an “item of 

income.”7 3 Id. at 214. The Court noted that § 61(a)(12) 

4 explicitly provides that discharge of indebtedness generally 

5 is included in gross income. Id. at 213. The Court reasoned 

6 that while §§ 101 through 136 exclude certain items from gross 

7 income, the “mere exclusion of an amount from gross income 

8 does not imply that the amount ceases to be an item of 

9 income.” Id. The Court also stated that “[i]f discharge of 

10 indebtedness of insolvent entities were not actually ‘income,’ 

11 there would be no need to provide an exception to its 

12 inclusion in gross income.” Id. at 214. 

13 The petitioners argue that, based on the reasoning in 

14 Gitlitz, there would be no need to exclude capital 

15 contributions from gross income, as § 118(a) does, if capital 

16 contributions were not already included in gross income 

17 pursuant to § 61(a). The petitioners argue that, therefore, 

18 capital contributions are fundamentally income and constitute 

 7

 The Supreme Court acknowledged that the result of Gitlitz would be 

to allow shareholders a “double windfall”: The corporation’s discharge of 

indebtedness income would be excluded and not passed through as taxable 

income and the shareholders would be able to increase their bases in 

stock. Gitlitz, 531 U.S. at 219-20. However, the Court found that the 

result was required by the “plain text” of the Code. Id. at 220. After 

Gitlitz was decided, Congress added language to § 108(d)(7)(A) barring the 

pass-through of excluded discharge of indebtedness income to the 

shareholders of S corporations and eliminating the resulting increase in 

basis: “In the case of an S corporation, subsections (a), (b), (c), and 

(g) shall be applied at the corporate level, including by not taking into 

account under section 1366(a) any amount excluded under subsection (a) of 

this section.” Job Creation and Worker Assistance Act of 2002, Pub. L. 

No. 107-147, § 402(a), 116 Stat. 21, 40. 
-19-

1 “items of income (including tax-exempt income)” for the 

2 purposes of § 1366(a)(1)(A). This argument ignores the 

3 critical difference between Gitlitz and this case: Gitlitz

4 addressed payments that explicitly were included in gross 

5 income under § 61(a). See § 61(a)(12) (“[G]ross income means 

6 all income . . . including (but not limited to) . . . (12) 

7 [i]ncome from discharge of indebtedness . . . .”). While the 

8 petitioners are correct that the list of items of income in 

9 § 61(a) is not exclusive, the petitioners cannot rely on 

10 Gitlitz alone to overcome the long-standing treatment of 

11 capital contributions as distinct from income. Gitlitz did 

12 not create any new items of income. Gitlitz only held that 

13 the nature of discharge of indebtedness as income was not 

14 changed by the exclusion in § 108(a). 

15 Unlike this case, the Commissioner in Gitlitz admitted 

16 that the item at issue—discharge of indebtedness—generally was 

17 included in gross income, but argued that the exclusion of 

18 discharge of indebtedness of insolvent entities in § 108(a) 

19 altered the character of that item. It was only in rejecting 

20 this argument that Gitlitz noted that it would be unnecessary 

21 to exclude discharge of indebtedness of insolvent entities 

22 from gross income if discharge of indebtedness in general were 

23 not already income. In this case, capital contributions 

24 traditionally have not been included in gross income in the 
-20-

1 first instance and the fact that § 118(a) explicitly excludes 

2 them does not transform them into “items of income” for the 

3 purposes of § 1366(a)(1)(A). 

4 The petitioners’ view of the superfluous nature of 

5 § 118(a) is belied by the legislative history of that section. 

6 The legislative history of § 118(a) shows that, unlike 

7 discharge of indebtedness, Congress did not consider 

8 shareholder capital contributions to be generally includible 

9 in gross income when it created the exclusion. See State Farm 

10 Road Corp. v. Comm’r, 65 T.C. 217, 227 (1975) (noting that 

11 § 118 was “intended as an incorporation of existing decisional 

12 law”). As discussed above, § 118(a)’s exclusion of “any

13 contribution to the capital of the taxpayer” (emphasis added) 

14 was intended to codify certain cases finding that 

15 nonshareholder, in addition to shareholder, capital 

16 contributions were not income. Treasury Regulation section 

17 1.118-1 underscores this understanding of § 118(a) by 

18 explicitly stating that both shareholder and nonshareholder 

19 capital contributions “do not constitute income” to a 

20 corporation. 

21 In addition to their argument based on Gitlitz and § 118, 

22 the petitioners argue that § 108(e)(6) demonstrates that 

23 capital contributions constitute income. Section 108(e)(6) 

24 provides a mechanism for taxing the discharge of any 
-21-

1 indebtedness that was acquired by a corporation as a capital 

2 contribution. Section 108(e)(6) provides that 

3 for purposes of determining income of the debtor 

4 from discharge of indebtedness, if a debtor 

5 corporation acquires its indebtedness from a 

6 shareholder as a contribution to capital— 

7 (A) section 118 shall not apply, but 

8 (B) such corporation shall be treated as having 

9 satisfied the indebtedness with an amount of money 

10 equal to the shareholder’s adjusted basis in the 

11 indebtedness. 

12 

13 The petitioners argue that because § 108(e)(6) allows for 

14 discharge of indebtedness acquired as a capital contribution 

15 to be taxed as income to the corporation, capital 

16 contributions must be “items of income” for the purposes of 

17 § 1366(a)(1)(A). However, discharge of indebtedness is 

18 explicitly included in gross income in § 61(a)(12) and, under 

19 Gitlitz, is an “item of income” for the purposes of 

20 § 1366(a)(1)(A) even when it is exempt from taxation. The 

21 fact that Congress chose, when confronted with the confluence 

22 of discharge of indebtedness, which is income, and capital 

23 contributions, which traditionally have not been considered 

24 income, to subject discharge of indebtedness acquired as a 

25 capital contribution to taxation does not mean that capital 

26 contributions that are not discharge of indebtedness 
-22-

1 constitute “items of income (including tax-exempt income)” for 

the purposes of § 1366(a)(1)(A).8 2 

3 We are not aware of any case that has held that capital 

4 contributions are “income” under § 1366(a)(1)(A) or any other 

5 provision of the Code. On the contrary, the Supreme Court and 

6 this Court have repeatedly emphasized the distinction between 

7 capital and income. See, e.g., Macomber, 252 U.S. at 214-15; 

8 Cuba R.R., 268 U.S. at 632-33; Oregon-Washington, 251 F. at 

9 213. The petitioners argue that Glenshaw Glass has overruled 

10 the earlier cases’ treatment of capital as distinct from 

11 income because it rejected Macomber’s definition of income as 

12 “‘the gain derived from capital, from labor, or from both 

13 combined.’” Glenshaw Glass, 348 U.S. at 430-31 (quoting 

14 Macomber, 252 U.S. at 207). However, the decision in Glenshaw 

15 Glass was founded on “the intention of Congress to tax all 

16 gains except those specifically exempted.” Glenshaw Glass, 

17 348 U.S. at 430. In deciding that the punitive damages at 

18 issue in that case were a taxable gain, even though not 

19 derived from capital or labor, Glenshaw Glass did not overrule 

20 the previous cases’ distinction between capital and income. 

 8

 The legislative history of § 108(e)(6) indicates that it was 

enacted to override the decision of the Court of Appeals for the Fifth 

Circuit in Putoma Corp. v. Commissioner, 601 F.2d 734, 751 (5th Cir. 

1979), which held that a shareholder’s discharge of indebtedness acquired 

by the corporation as a capital contribution was not taxable income to the 

corporation because it was a capital contribution. S. Rep. No. 96-1035, 

at 18-19, 56 n.24 (1980), reprinted in 1980 U.S.C.C.A.N. 7017, 7033-34, 

7068 n.24. 
-23-

1 On the contrary, Glenshaw Glass recognized that Macomber’s 

2 definition of income was “useful” in that case precisely 

3 because it “distinguish[ed] gain from capital.” Id. at 431. 

4 Capital contributions are not gains to a corporation. Rather, 

5 they “represent an additional price paid for[] the shares of 

6 stock held by the individual shareholders” of a corporation, 

7 and are treated as a part of the operating capital of the 

8 company. Treas. Reg. § 1.118-1. 

9 In arguing that Glenshaw Glass erased the traditional 

10 distinction between capital contributions and income, the 

11 petitioners also rely on an I.R.S. General Counsel Memorandum 

12 dated December 21, 1977 (the “Memorandum”), which addressed 

13 whether certain nonshareholder contributions made to a public 

14 utility constituted excludable capital contributions under 

15 § 118(a) or constituted taxable income to the utility. The 

16 Memorandum concluded that because the contributions were 

17 motivated by the nonshareholder’s desire to obtain a more 

18 reliable source of electric power, the amounts were taxable 

19 income, not contributions to capital. In providing a history 

20 of the taxation of nonshareholder capital contributions, the 

21 Memorandum noted that “the constitutional basis” of Cuba 

22 Railroad “seems to have been considerably weakened” by 

23 Glenshaw Glass and its progeny. I.R.S. Gen. Couns. Mem. 

24 37,354 (Dec. 21, 1977) (citing State Farm Road Corp., 65 T.C. 
-24-

1 at 227). The Memorandum explained that payments like those 

2 made by the Cuban government to the railroad “can no longer be 

3 characterized as falling outside the scope of gross income 

4 within the meaning of Code § 61.” I.R.S. Gen. Couns. Mem. 

5 37,354 (Dec. 21, 1977). Rather, according to the Memorandum, 

6 those payments would be part of a “new class of tax-exempt 

7 transactions, called contributions to capital, that was 

8 codified in 1954 as Code § 118.” Id. 

9 I.R.S. General Counsel Memoranda are informal documents 

10 written by the I.R.S. Chief Counsel’s office. They provide 

11 the Chief Counsel’s opinion on particular tax matters before 

12 other I.R.S. officials. The Memorandum at issue in this case 

13 includes a disclaimer that it is “not to be relied upon or 

14 otherwise cited as precedent by taxpayers.” Id. As a result, 

15 the Memorandum is not entitled to deference under Chevron 

16 U.S.A. Inc. v. National Resources Defense Council, Inc., 467 

17 U.S. 837 (1984), because it is an informal letter that itself 

renounces any force-of-law effect.9 18 See United States v. Mead 

 9

 In Morganbesser v. United States, 984 F.2d 560, 563 (2d Cir. 1993) 

(quoting Herrmann v. E.W. Wylie Corp., 766 F. Supp. 800, 802-03 (D.N.D. 

1991)), this Court noted that “[General Counsel Memoranda] are helpful in 

interpreting the Tax Code when ‘faced with an almost total absence of case 

law.’” The Court, therefore, found it “arguably permissible” to use 

General Counsel Memoranda (“GCMs”) to “instruct the court on how the 

[I.R.S.] itself” defines “labor organization,” because they were “the only 

real guidance as to what the [I.R.S.] considers a labor organization for 

the purposes” of the Code. Id. Courts of Appeals in other circuits have 

declined to rely on GCMs. See Tupper v. United States, 134 F.3d 444, 448 

& n.5 (1st Cir. 1998) (“GCMs . . . are not authority in this court.”); 

Stichting Pensioenfonds Voor de Gezondheid v. United States, 129 F.3d 195, 
-25-

1 Corp., 533 U.S. 218, 226-27 (2001) (holding that Chevron

2 deference is appropriate “when it appears that Congress 

3 delegated authority to the agency generally to make rules 

4 carrying the force of law, and that the agency interpretation 

5 claiming deference was promulgated in the exercise of that 

6 authority”); Christensen v. Harris County, 529 U.S. 576, 587-

7 88 (2000) (holding that agency interpretations contained in 

8 informal opinion letters are not entitled to Chevron

9 deference). Any “respect” afforded to the Memorandum would 

10 only be proportional to its “power to persuade” pursuant to 

11 Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944). 

12 Christensen, 529 U.S. at 587. 

13 In this case, we decline to rely on the Memorandum 

14 because it disclaims precedential effect and is not entitled 

15 to deference under Chevron. Furthermore, the persuasiveness 

16 of the Memorandum is limited in light of the fact that the 

17 Memorandum does not address the question whether capital 

18 contributions such as those in this case constitute “tax19 exempt income” for the purposes of § 1366(a)(1)(A). The 

20 Memorandum, like Cuba Railroad, deals only with nonshareholder 

21 capital contributions, the scope of which has been clarified 

22 by several Supreme Court decisions following Cuba Railroad. 

 

200 (D.C. Cir. 1997) (“These ‘GCMs,’ however, have no precedential 

value.”); Disabled Am. Veterans v. Comm’r, 942 F.2d 309, 315 n.5 (6th Cir. 

1991) (“Such informal, unpublished opinions of attorneys within the 

[I.R.S.] are of no precedential value . . . .”). 
-26-

1 See, e.g., Brown Shoe Co., 339 U.S. at 591-93; Detroit Edison 

2 Co., 319 U.S. at 103. 

3 Finally, the petitioners point to two cases from Courts 

4 of Appeals in other circuits that allegedly show that capital 

5 contributions constitute income. In one case, the Court of 

6 Appeals for the Seventh Circuit referred to “tax-exempt 

7 capital contributions.” Am. Med. Ass’n v. United States, 887 

8 F.2d 760, 774 (7th Cir. 1989). In the other, the Court of 

9 Appeals for the Ninth Circuit addressed whether certain 

10 payments were “exempt from federal income tax as contributions 

11 to capital.” Washington Athletic Club v. United States, 614 

12 F.2d 670, 671 (9th Cir. 1980). The petitioners argue that 

13 because the above cases referred to capital contributions as 

14 being “exempt” from income, these cases demonstrate that 

15 capital contributions are “tax-exempt income” for the purposes 

16 of § 1366(a)(1)(A). However, these cases did not hold that 

17 capital contributions constitute income. Rather, they 

18 discussed, among other things, whether certain membership fees 

19 paid to associations constituted capital contributions or 

20 taxable income. The fact that these cases may have used 

21 imprecise language to express the fact that capital 

22 contributions are not subject to taxation does not mean that 
-27-

capital contributions are income.10 1 In fact, American Medical 

2 Association explicitly recognized the distinction between 

3 capital contributions and income when it noted that if the 

4 plaintiff in that case argued that certain funds it received 

5 “should be likened to capital contributions, it would argue 

6 that those monies should never be considered income.” Am. 

7 Med. Ass’n, 887 F.2d at 774 n.15. 

8 Therefore, for all of these reasons, we find that the 

9 petitioners’ capital contributions do not constitute “items of 

10 income (including tax-exempt income)” under § 1366(a)(1)(A) 

11 and cannot be used to restore their bases in indebtedness 

12 pursuant to § 1367(b)(2)(B). 

13 III 

14 As an alternative to using their capital contributions to 

15 increase their loan bases and thereby reduce their taxable 

16 income, the petitioners argue that they should be allowed to 

17 deduct their capital contributions to G & D Farms as losses 

18 incurred in a transaction entered into for profit pursuant to 

19 § 165(c)(2). The petitioners do not argue that their capital 

20 contributions to W & N California should be deductible. 

 10 It is difficult to place too much emphasis on the specific 

language in those decisions. In calculating taxable income, in most 

circumstances, there is no difference between the case where an item is 

included in gross income pursuant to § 61(a) and then excluded from gross 

income by another Code section and the case where the item is not 

includible under § 61(a) at all. 
-28-

1 Section 165(c)(2) provides that individuals are allowed a 

2 deduction from taxable income for “losses incurred in any 

3 transaction entered into for profit, though not connected with 

4 a trade or business.” In general, a negotiated payment to 

5 secure a release from conditional liability under a loan 

6 guarantee is deductible as a loss incurred in a transaction 

7 entered into for profit. See, e.g., Duke v. United States, 

8 No. 75 Civ. 5122, 1977 WL 1082, at *2 (S.D.N.Y. Jan. 31, 

9 1977); Shea v. Comm’r, 36 T.C. 577, 582 (1961), aff’d, 327 

10 F.2d 1002 (5th Cir. 1964); Lloyd-Smith v. Comm’r, 40 B.T.A. 

11 214, 223 (1939), aff’d on other grounds, 116 F.2d 642 (2d Cir. 

12 1941). 

13 “This court has repeatedly held that, in determining the 

14 deductibility of a loss, the primary motive must be 

15 ascertained and given effect.” Austin v. Comm’r, 298 F.2d 

16 583, 584 (2d Cir. 1962); see also Helvering v. Nat’l Grocery 

17 Co., 304 U.S. 282, 289 n.5 (1938) (“[T]he deductibility of 

18 losses under [the predecessor of § 165(c)] may depend upon 

19 whether the taxpayer’s motive in entering into the transaction 

20 was primarily profit.”); Ewing v. Comm’r, 213 F.2d 438, 439 

21 (2d Cir. 1954). The burden of proving the requisite motive is 

22 on the petitioners. Cf. Sutton v. Comm’r, 84 T.C. 210, 221 

23 (1985), aff’d, 788 F.2d 695 (11th Cir. 1986).
-29-

1 Instead of looking to the “primary motive,” some courts 

2 have attempted to ascertain whether the “sole purpose” of a 

3 taxpayer’s payment was to secure a release from a loan 

4 guarantee before allowing the taxpayer to take a deduction 

5 pursuant to § 165(c)(2). See Duke, 1977 WL 1082, at *2; Shea, 

6 36 T.C. at 582; Lloyd-Smith, 40 B.T.A. at 223. In Duke, the 

7 court denied the taxpayers’ motion for summary judgment 

8 because it could not determine if their payment was for the 

9 “sole purpose” of securing a release from a guarantee or 

10 rather was the purchase price of a capital asset. Duke, 1977 

11 WL 1082, at *2. 

12 In this case, the Tax Court found that the petitioners 

13 “clearly had multiple purposes in making the[ir] capital 

14 contributions,” and, therefore, distinguished this case from 

15 those that allowed deductions upon finding that payments were 

16 made for the “sole purpose” of obtaining releases from loan 

17 guarantees. Nathel, 131 T.C. at 274. The Tax Court noted 

18 that the parties stipulated that the Nathels made the 

19 contributions in connection with the banks’ release of the 

20 petitioners’ guarantees, in connection with Mr. Wishnatzki’s 

21 assumption of responsibility as a guarantor, and to obtain Mr. 

22 Wishnatzki’s agreement to the reorganization plan. Id. The 

23 Tax Court found that, therefore, the petitioners did not make 

24 the contributions for the “sole purpose of being released from 
-30-

1 their guarantees on the bank loans” and, as a result, it found 

2 that the contributions were not deductible pursuant to 

3 § 165(c)(2). Id. at 274-75. 

4 To the extent the Tax Court required the capital 

5 contributions to be for the sole purpose of obtaining releases 

6 from the loan guarantees, the Tax Court required too much. 

7 The capital contributions need only have been made for the 

8 primary purpose of obtaining the releases in order to be 

9 deductible as losses incurred in a transaction entered into 

10 for profit. However, the Tax Court’s error was harmless 

11 because the petitioners did not meet their burden of showing 

12 that the primary purpose of the contributions was to obtain 

13 the releases from the guarantees. 

14 The petitioners argue that the parties’ stipulation 

15 before the Tax Court proves that the capital contributions 

16 were made for the primary purpose of obtaining the releases. 

17 The petitioners point to paragraph 26 of the stipulation, 

18 which provides that “[a]s a condition for releasing [the 

19 Nathels] from their guarantees of [G & D Farms’] debt, the 

20 Banks and [Mr. Wishnatzki] required [the Nathels] to each 

21 contribute to [G & D Farms] additional capital in the amount 

22 of $537,228.00.” (Stip. ¶ 26.) The petitioners also rely on 

23 paragraph 34 of the stipulation, which provides that the 

24 Nathels’ capital contributions to G & D Farms “were made 
-31-

1 . . . to secure the release of their respective guarantees of 

2 [G & D Farms’] debts to the Banks and to obtain [Mr. 

3 Wishnatzki’s] agreement to the release of the Nathels from 

4 their guarantees and to the reorganization plan.” (Stip. ¶ 34 

5 (emphasis added).) 

6 While paragraph 26 of the stipulation states that the 

7 capital contributions were a condition of the petitioners’ 

8 release from their loan guarantees, there is no stipulation 

9 that the primary purpose of the contributions was to obtain 

10 that release. Paragraph 34 of the stipulation provides that 

11 the capital contributions were made for three purposes: (1) 

12 to secure the petitioners’ release from the guarantees of 

13 G & D Farms’ debts, (2) to obtain Mr. Wishnatzki’s agreement 

14 to the release of the Nathels from the guarantees, and (3) to 

15 obtain Mr. Wishnatzki’s agreement to the reorganization plan. 

16 The stipulation, therefore, suggests that the capital 

17 contributions were made to achieve multiple purposes, without 

18 indicating which, if any, was the primary purpose. 

19 The petitioners point to several cases that demonstrate 

20 that payments can have multiple purposes and still be 

21 deductible under § 165(c)(2). The petitioners argue that 

22 these cases show that the capital contributions here are 

23 deductible. The petitioners read too much into these cases. 

24 In Rushing v. Comm’r, 58 T.C. 996, 1000-01, 1005 (1972), the 
-32-

1 Tax Court distinguished between two payments the taxpayers 

2 attempted to deduct: legal expenses connected with the 

3 petitioners’ personal guarantee of a corporation’s debt, which 

4 the court found to be deductible, and other fees related to 

5 the sale of the corporation’s assets, which it found to be not 

6 deductible. Rushing simply demonstrates that if a court can 

7 determine that the principal purpose of any one of a number of 

8 payments was in connection with a transaction entered into for 

9 profit, then the payment may be deducted pursuant to 

10 § 165(c)(2). In this case, it cannot be determined what 

11 portion of petitioners’ capital contributions, if any, was 

12 principally made to obtain the petitioners’ release from the 

13 guarantees. 

14 The petitioners also point to a case from another 

15 circuit, Commissioner v. Condit, 333 F.2d 585, 587-88 (10th 

16 Cir. 1964), in which the court found that the taxpayer 

17 “attained three objectives” through making a certain payment, 

18 including obtaining a release on a loan guarantee, settling a 

19 debt with the payee, and transferring the responsibility for 

20 winding up a business. The court found that the taxpayer’s 

21 payment “was not the payment of a debt within the purview of 

22 [26 U.S.C.] § 166(d) but rather a loss incurred in a 

23 transaction for profit.” Id. at 588. To the extent that the 

24 court in Condit found that the payment had no primary purpose, 
-33-

1 but nevertheless was deductible pursuant to § 165(c)(2), it is 

2 inconsistent with prior decisions of this Court and we decline 

3 to follow it. 

4 In addition to relying on the parties’ stipulations 

5 regarding the purposes of the capital contributions, the 

6 petitioners argue that the fact that G & D Farms and W & N New 

7 York “were sold for each corporation’s fair market value” to 

8 Mr. Wishnatzki and the Nathels, respectively (Stip. ¶ 46), 

9 illustrates that the petitioners’ capital contributions to 

10 G & D Farms could not have been part of the price the Nathels 

11 paid to obtain Mr. Wishnatzki’s agreement to the sale of the 

12 companies. The petitioners argue that, therefore, the primary 

13 purpose of the capital contributions was to obtain the 

14 petitioners’ release from the loan guarantees. However, there 

15 is no reason to believe that the petitioners’ capital 

16 contributions were not part of the “fair market value” price 

17 for which the corporations were sold as part of the 

18 reorganization plan. 

19 In their reply brief, the petitioners argue for the first 

20 time that their capital contributions were made in connection 

21 with a transaction entered into for profit because, as 

22 shareholders of both G & D Farms and W & N New York at the 

23 time, they signed their personal guarantees of G & D Farms’ 

24 loans in order to improve the financial position of both 
-34-

1 corporations, in light of the fact that W & N New York’s 

2 business allegedly was dependent on receiving produce from 

3 G & D Farms. However, the Commissioner does not contest that 

4 the Nathels’ personal guarantees of G & D Farms’ loans 

5 constituted a transaction entered into for profit. The 

6 question is whether the primary purpose of the Nathels’ 

7 subsequent capital contributions was to obtain releases from 

8 the loan guarantees. The fact that the Nathels expected the 

9 guarantees to benefit G & D Farms and W & N New York does not 

10 establish the primary purpose of the Nathels’ capital 

11 contributions. 

12 The petitioners did not meet their burden of showing that 

13 the capital contributions were primarily motivated by a desire 

14 to obtain releases from the loan guarantees. Therefore, the 

15 capital contributions are not deductible as losses incurred in 

16 a transaction entered into for profit pursuant to § 165(c)(2). 

17 CONCLUSION

18 For all of the reasons explained above, we AFFIRM the Tax 

19 Court’s decision.