T.C. M em o . 2 0 1 7 -1 2 7

UNITED STATES TAX COURT

ELLIS J . SALLOUM AND M ARY VIRGINIA H. SALLOUM , Pet it i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 7 7 09 -1 5
. Fi l edJ u n e 2 9 , 2 0 1 7
.

J am es G. M cGee, J r., fo r p et i t i o n ers . Cl i n t J . Lo ck e an d Th o m as A. Fri d ay , fo r res p o n den t
.

M EM ORANDUM FINDINGS OF FACT AND OPINION CHIECHI, J ud g e: Res p o n d en td et erm in eda d efi ci en cy i n , an dan accu racy rel at ed p en al ty

u n d er s ect io n 6 6 6 2 (a) 1 o n , p et i t i o n ers ’ Fed eral i nco m e t ax (t ax ) fo r th ei r t ax ab l e y ear 2 0 1 2 o f $ 1 6,9 2 3 an d$ 3,3 8 4 .6 0 , res p ect i v el y .

1 Al l s ect i o n referen ces are t o th e In tern al Rev en u e Co d e (Co de) i n effect fo r th e y ear at i s s u e. Al l Ru l e referen ces are t o the Tax Co u rtRu l es o f Pract i ce an d Pro cedure.- 2

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[* 2 ] Th e i s s u es fo r d eci si o n fo r p et i t i o n ers ’ t ax ab l e y ear 2 0 1 2 are: (1 ) Do es th e $ 1 46 ,5 0 0 th atCen t erp o in tM ed i cal Cen t er o f In dep en d en ce, LLC d .b .a. Cen t erp o i n t M ed i cal Cen t er, tran sferred t o p et i t i o ner El l i s J . Sal l o u m du ri n g 2 0 0 9 co n s t i tu te a l o an ? W e h o ldth ati t d o es . (2 ) Are p et it i o n ers l i ab l e fo r t h e accu racy -rel at edp en al ty u nd er s ect i o n 6 6 6 2 (a)? W e h o l d th atth ey are. FINDINGS OF FACT Al l o f t h e fact s i n thi s cas e, wh ich th e p art i es s ub m i tt edu n der Ru l e 1 2 2 , h av e b een s t i p u lat edb y

th e p art i es an dare s o fo u nd

. Pet i t i o ners res i d edi n M i s s i s s i p p i atth e t i m e t h ey fi l edth e p et i t i o n. Ata t i m e n o tes t ab l i s h edb y th e reco rd , Cen t erp o in tM ed i cal Cen t er o f In d ep en den ce, LLC d .b

. a. Cen t erp oi n t M ed i cal Cen t er (CM C), was en gag edi n
recru i t i n g p et i ti o n er El l i s J
. Sal l o u m 2 t o jo i n th ei r m ed i cal p ract i ce as a v as cu l ar
s u rg eo n . CM C’ s recru i ti n g effo rt s were s u cces s fu l . OnAp ri l 2 3 , 2 0 0 9 , CM C an d p et i t i o n er en t eredi nt o an ag reem en tp u rs uan tt o a d o cu m en t t i t l ed“ PHYSICIAN RECRUITING AGREEM ENT” th atco m p ri s ed fi v e d ocu m en t s, i n cl u d in g a d o cu m en tt i t l ed “ RECRUITING AGREEM ENT”. (W e s h al l s o m et i m es refer t o

2 Un l es s o th erwi s e s t at ed , o u r referen ces t o p et i t i o n er are t o p et i t io n er El l i s J
. Sal l o u m .- 3

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[* 3 ] al l fi v e o f t he d o cu m en t s i n cl u d edi n th e d o cu m en t t i t l ed“ PHYSICIAN RECRUITING AGREEM ENT” as th e p h y s ici an ’ s recru i t i n g ag reem en t . W e s h al l refer t o th e d ocu m en tt i t l ed “ RECRUITING AGREEM ENT” th ati s p arto f t h e p h y s i ci an ’ s recru i t i ng ag reem en tas th e recru i t i n g ag reem en t .) Pet i t i o n er s i g n ed each o f t h e fi v e d o cu m en t s th atwere i n cl u d edi n th e p h y s ici an ’ s recru it i n g ag reem en tex cep t th e d o cu m en tt i t l ed“ INTERNAL CERTIFICATION”, wh i ch
was s ig n edb y cert ai n rep res en tat i v es o f CM C. CM C an dp et i t i o ner ag reedi n th e p h y s i ci an ’ s recru i t i n g ag reem en t th at (1 ) p et i t i o n er was t o jo i n CM C’ s m ed i cal p ract i ce i n In d ep en d en ce, M i s s o u ri , fo r a p eri o do f atl eas t3 6 m o n ths du ri n g wh i ch h e was t o en g ag e i n the p ri v at e p ract ice
o f m ed i ci n e as a v as cu l ar s u rg eo n ; (2 ) p et i t i o n er was t o wo rki n CM C’ s m ed i cal p ract i ce as an i n d ep en d en tco n tract o r; an d(3 ) CM C was t o l o an t o p et i t i o n er $ 1 4 6 ,5 0 0 t o b e ad v an cedi n m o n t h l y i n s t al l m en t s o v er a p eri o do f s i x m o n th s an d th atl o anwas t o b e ev i d en cedb y a p ro m i s s ory

n ot e. 3 On e o f t h e d o cu m en t s th ati s p arto f t h e p h y s i ci an ’ s recru i t i n g ag reem en t
was t i t l ed“ COM PENSATION GUARANTEE W ITH FORGIVENESS”. Th at d o cu m en ti n co rp o rat edb y referen ce an dh adat t ach edt o i tan o th er d o cu m en tt i t l ed

3 In th e fi rs ts t i p u l at i o n o f fact s , th e p art i es co ns i s t en t ly d es cri b edth e tran s fer b y

CM C t o p et i t i o n er o f $ 1 4 6 ,5 0 0 as a “ lo an ” t o h i m an d as the “ $ 1 4 6 ,5 0 0 l o an ”. W e s hal l s o m et i m es d o th e s am e.- 4

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[* 4 ] “ PROM ISSORY NOTE”. (W e s h al l s o m et i m es refer t o t h e d o cu m en tt i t l ed

“ COM PENSATION GUARANTEE W ITH FORGIVENESS” as th e co m p en s at io n g u aran tee wi th fo rg i v en es s ag reem en t . W e s hal l refer t o the d o cu m en tt it l ed

“ PROM ISSORY NOTE” t h atwas i n co rp o rat ed b y referen ce i n th e co m

p en s at i o n g u aran tee wi th fo rg i v en es s ag reem en tan dat t ach edth eret o as th e p ro m i ss o ry
n o t e.) Pet i t i on er n o to n ly s i g n edth e co m

p en s at i o n g u aran t ee wi th fo rg i ven es s ag reem en t , h e al s o s i gn edth e p ro m i ss o ry n o t e. Th e recru i t in g ag reem en t , th e
co m p en s at i o n g u aran t ee wi th fo rg i v en es s ag reem en t , an d th e p ro m i s s o ry n o t e s et fo rt h t he ag reem en t s o f CM C an dp et i t i o n er wi th res p ectt o , i n ter al i a, t h e $ 1 4 6 ,5 0 0 th atCM C ag reedt o l o an t o p et i t i o n er. (W e s h al l s o m et im es refer
co l l ect i v el y

t o th e p ro v i s i o n s o f t h e recru i ti n g ag reem en t , th e co m p en s at i o n g u aran tee wi th fo rg i v en es s ag reem en t , an d t h e p ro m i s so ry n o t e t h ats etfo rt h th e ag reem en t s o f CM C an dp et i t i o n er wi th res p ectt o th e $ 1 4 6,5 0 0 th atCM C ag reed t o tran sfer t o h i m

as th e ag reem en twi th res pect t o t h e $ 1 46 ,5 0 0 tran s fer t o p et i t i o n er.) Th e recru i t i n g ag reem en tp ro v id edi n p ert in en tp artth atp et i t i o n er “ ag rees t o en g ag e i n th e p ri vat e p ract i ce o f m ed i ci ne as a/ anVas cu l ar Su rg eo n i n th e Co m m u n i ty o n a fu l l -t i m e p erm an en tb as i s fo r atl eas tth i rt y -s i x (3 6 ) m on th s aft er Ph y s i ci an[p et i t io ner] co m m en ces s ai dp ri v at e p ract i ce o f m ed i ci ne”. Th e recru i t
-- 5
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[* 5 ] i n g ag reem en tfu rt h er p ro v i d edi n p ert i nen tp artth atCM C was t o rep o rti n Fo rm 1 0 9 9 -M ISC, M i s cel l an eo u s In co m e (Fo rm 1 0 9 9 -M ISC), an y co m pen s at i o n th atp et i t i o n er recei ved , reg ard l es s o f wh et h er h e recei v edcas h co m p en s at io n fro m CM C o r co m

p en s at i o n fro m

CM C as a res u l t o f t h e “ fo rg i v en es s o f am ou n t s
o wed ” b y p et i ti o n er t o CM C. Th e co m p en s at i o n g u aran t ee wi th fo rg i v en es s ag reem en tan dth e p ro m i s s o ry n o t e p ro v id edi n p ert i n en tp artth atp et it i o n er was o b l i g at edt o rep ay t o CM C th e $ 1 46 ,5 0 0 th at i tag reedt o , an dd i d , l o an t o h i m . Th e co m p en s at i o n g u aran t ee wi th fo rg i v en es s ag reem en t p ro v i d edi n p ert in en tp art : A. Ho s p i t al [CM C] h ereb y ag rees t o l o an Ph y s i ci an [p et i t i o n er] cert ai n am ou nt s o f m o n ey wh i ch Ho s p i t al s h al l ad van ce as a g u aran t ee o f co m

p en s at i o n fo r Ph y s ici an t o tal i n g a m ax i m u m o f $ 1 4 6 ,5 0 0.0 0 (h erei n aft er t h e “ Guaran t ee Am ou n t”). Fo r p u rp o s es o f th e Recru it in g Ag reem en tan dan y Ad d en da t heret o, the Gu aran t ee Am o u n t s hal l b e l i m it edt o th e s al ary p ai dt o , o r i n cu rred o n b eh al f o f, Ph y s i ci an . Th e p art i es ag ree an dh av e v eri fi edth at th e Gu aran t ee Am o u n t rep res en t s n o m o re t h an fai r m ark etv al u e fo r Ph y s i ci an ’ s s p eci al i ty i n th e Co m

m u n i ty . B. Th e Gu aran t ee Am o un ts h al l b e p ai do v er a p eri o do f s i x (6 ) m o n th s * * * (“ Gu aran t ee Peri o d ”) i n m o n th l y i n s t al l m en t s (“ Gu aran t ee Pay m en ts ”) * * *

* * * * * * * E. Ph y s i ci an ag rees t o act i v el y en gag e i n th e fu l l-t i m e p ract i ce o f m ed i ci n e i n th e Co m

m u ni ty an dg eo g rap h i c area s erv edb y Ho s p i t al , t o b i l l al l p at i en t s an dth i rd -p art y p ay o rs p ro m

p t l y fo r al l s erv i ces- 6

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[* 6 ] ren d ered , an dt o u s e h is /h er b es teffo rt s t o co l l ectal l p at i en tacco u n t s . Ho s p i t al s h al l h av e t he ri g h tt o rev i ew an dau d i tPh y s i ci an ’ s b oo k s an d reco rd s fo r wh at ev er p eri o do f t i m e i s n eces s ary t o as su re co m p li an ce wi t h th e Recru it in g Ag reem en tan dan y Ad d en da t heret o. F. Atth e en d o f t h e Gu aran t ee Peri o d , th e s u m o f al l Gu aran t ee Paym en t s m ad e b y

Ho sp i t al t o Ph y si ci andu ri n g t h e Gu aran t ee Peri od , n o to th erwi s e rep ai d o r reco up edp u rs u an tt o an y o th er p ro v i s i o n i n th i s Ad d en du m

[co m p en s at i o n g u aran t ee wi th fo rg i v en es s ag reem en t ] , s h al l b e cal cu lat ed . Th i s am o u n trep res en t s th e “ Lo an Rep ay m en tAm o u n t ” wh i ch s h al l b e due an dp ay ab l e b y Ph y s i ci an as ev i d en cedb y

th e at t ach edPro m i ss o ry

No t e (Ex h i b i t “ A ”) ex ecu tedb y Ph y s i ci an . Al th o u g h n o ti n cl u d edi n th e Lo an Rep aym en tAm o un t , ad d i ti o n al am o u n ts m ay

b e du e fro m

Ph y s i ci an t o Ho s p i t al i n acco rd an ce wi th t h e t erm s o f t h e Ad d en d a at t ach edan dm ad e a p arto f t h e Recru i t i n g Ag reem en t . In t eres to n th e Lo an Rep aym en tAm o u ntwi ll b eg i n t o accru e atthe en do f the Gu aran t ee Peri o d . Ho wev er, i n an effo rtt o en co u rag e p ro m

p tp aym en t , i n t eres twi ll b e fo rg i ven o n an y am o u nt s rep ai dwi th i n s i x (6 ) m o n ths o f t h e en d o f t h e Gu aran tee Peri o d . Am o u n ts s o fo rg i v en , i f an y , (as wel l as an y i m pu t edi n co m e as req ui red b y l aw) wi l l b e rep o rt edo n Fo rm 1 0 9 9 as p res cri b edb y th e In tern al Rev en u e Serv i ce. G. No twi th s t an di n g , i n reco g n i t i o n o f t h e fact th atPh y si ci an i s es t ab l i sh i ng h is /h er fu l l -t i m e m ed i cal p ract i ce i n th e Co m m un i ty an d g eo g rap h i c area s erv edb y Ho s p it al an dt o en co u rag e Ph y s i ci an t o rem ai n i n the Co m

m u n i ty an d g eo g rap h i c area s erv ed b y Ho s p i t al b ey o n dth e Gu aran t ee Peri o d, Ho s p i t al ag rees t o fo rg i v e an d can cel o ne thi rti eth (1 / 3 0 th ) o f Ph y s i ci an ’ s Lo an Rep aym en tAm o un tas cal cu l at edab o ve t o Ho s pi t al fo r each cal en d ar m o n th aft er th e en do f th e Gu aran t ee Peri o dthatPh y s i ci an (1 ) rem ai n s i n the fu ll -t i m e p ract i ce o f m ed i ci n e i n the Co m m u n it y an dg eo g rap hi c area s erv edb y Ho s p i t al , (2 ) m ai n t ai n s M ed i cal St aff m em b ers hi p an d p ri v i l eg es i n g o o ds t an d in g atHo s p i t al , an d(3 ) rem ai n s av ai l ab l e fo r em erg en cy ro o m co v erag e fo r p at i en t s o f Ho s p i t al ’ s em erg en cy ro o m . Am o u n ts fo rg iv en , i f an y , (as wel l as an y i m p u t edi n co m e as req u iredb y l aw) wi l l b e rep ort ed o n Fo rm 1 0 9 9 as p res cri b edb y th e In tern al Rev en u e- 7
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[* 7 ] Serv i ce. Am o un t s p ai di n erro r t o th e p h y s i ci an wi l l n o tb e s ubjectt o fo rg iv en es s . H. An y fai l u re b y

Ph y s i ci an t o co m

p l y wi th th e t erm s o f Parag rap h E o f t h i s Ad d en du m

s h al l b e co ns i d ered a m at eri al b reach o f t h i s Ad

d en du m an dth e Recru it i n g Ag reem en tb y Ph y s i ci an an d s h al l au tho

ri ze Ho s p it al , ati ts o pt i o n , t o p u rs u e t h e rem ed ies d es cri b edi n th e M at eri al Breach Sect io n o f t h e Recru i t in g Ag reem en t
. Th e p ro m i ss o ry

n o te p ro v i d edi n p ert i n en tp art : FOR VALUE RECEIVED, th e u n ders i g n ed , El l i s Sal l o u m , M D (“ Ph y s i ci an ” o r “ M ak er”), h ereb y p ro m i s es t o p ay , acco rd i n g t o t h e t erm s o f t h is No te, t o * * * [CM C] an y an dal l am o u n t s as are act u al l y ad v an ced t o Ph y s ici an wh i ch i s referen cedt o as th e “ Lo an Rep aym en t Am o u n t ” i n th e at t ach edRecru i t i n g Ag reem en t Ad d en du m , p u rs u an t t o th e t erm s o f t h e Ph y s ici an Recru i tm en tAg reem en td at edM arch 1 0 , 2 0 0 9 b et ween th e Ho s p i t al an d Ph y si ci an(t h e “ Ag reem en t ”) t o wh i ch th i s No t e i s at t ach ed h eret o an di n wh i ch i ti s referred t o as Ex h i b itA (wh i ch p ro v i s i on s are i n co rp o rat edb y referen ce h erei n ) t o g et her wi th i n t eres tatth e rat e p er an n u m equal t o th e l o w er o f p ri m e as rep o rt ed i n th e m on ey

m ark etrat es s ect i o n o f t h e W al l St reet J o u rn al o n th e d at e p ro v i d edab o v e p l u s o ne p ercen t (1 % ) o r th e m ax i m um rat e p erm i t t edb y l aw. In t eres to n th e Lo an Rep aym en tAm o u ntwi l l b eg i n t o accru e atthe en do f t he Gu aran t ee Peri od . Ho wev er, i n t eres twi l l b e fo rg i ven o n an y

am ou n t s rep ai dwi th i n s i x (6 ) m o n th s o f t h e en do f th e Gu aran t ee Peri o d . Th i s fo rg i v enam o u nt , i f an y , wi l l b e rep o rt ed o n Fo rm 1 0 9 9 as p res cri bedb y

th e In tern al Rev en u e Serv i ce. Am o u n t s o u t s t an d i n g u n d er t h i s No t e are s ub jectt o fo rg i v en es s b u t s h al l b eco m e du e an dp ay ab l e i f Ph y si ci ans h al l fai l atan y t i m e du ri ng th e Co m

m i t m en tPeri o d(as d efi n edi n the Ag reem en tan d i n co rp orat edb y

referen ce h erei n ) t o fu l fi l l h i s /h er o b l i g at i o n s s et fo rt h i n th e Ag reem en t , an ds u ch d efau l t s h al l co n t i n u e fo r a p eri o d o f 1 0 d ay s aft er th e d efau l t i n g p art y recei v es wri tt en n o ti ce t h ereo f fro m- 8

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[* 8 ] th e o ther p art y

s p eci fy in g th e ex i s t en ce o f s u ch d efau ltan dth e d efau l t i n g p art y

h as n o t co m

m en ceda cu re o f s u ch co m p li an ce an d d em o ns trat edco n t i n u ed d i l ig en t p urs u i to f s u ch cu re aft er n o t i ce o f d efau l t . Inth e ev en t th atPh y s i ci an d o es d efau l t o n h i s /h er o b l i g at i on s s et fo rt h i n th e Ag reem en t , the Ho s p i t al m ay , ati ts o p t i o n, accel erat e an y

o u t s t an d i ng d eb tt o b e i m m ed i at el y du e an dp ay ab l e b y th e Ph y s i ci an . Am o u n t s s o p ay ab l e, an di n t eres t , s h al l b e p ay ab le i n th i rt y -s i x (3 6 ) equ al m o nt h l y

i n s tal l m en t s , th e fi rs ts u ch p aym en tt o b e p ai do n th e fi rs t b us in es s d ay

o f t h e m o n th fo l lo wi n g recei p t o f wri t t en n o t i ce t h at am o u nt s are due h ereu nd er, an ds ub s equ en ti n s t al l m en ts t o b e p ai d o n th e s am e d ay

o f each s u cceed in g cal en d ar m o n th u n t il al l am o u nt s h av e b een p ai d . Th e M ak er m ay p rep ay , wi th o u tp rem i u m o r p en al ty , al l o r an y p arto f t h i s No t e atan y

t i m e an dfro m

t i m e t o t i m e. Al l p aym en t s s h al l b e p ay ab l e i n l awfu l m o n ey o f t h e Un i t edSt at es . As s ecu ri ty

fo r the p aym en to f p ri n ci pal an di n t eres t o n th i s No te, M ak er h ereb y

i rrev o cab ly

g ran ts t o Ho l d er a s ecu ri ty i nt eres t i n , an d i rrev o cab ly

as s i g n s t o Ho l d er, al l acco u n ts recei v ab l e o f M ak er’ s p ri v at e p ract i ce o f m ed i ci n e, wh et h er n o w ex i st i n g o r h ereaft er ari s i n g (b utex cl u d i ng th o se fo r g o o d s o r s erv i ces t o b e p ai dfo r u n d er an y fed eral o r s t at e i ns u ran ce o r rei m b u rs em en tp ro g ram

th atp ro h i b

i t s as s i g n m en t o f s u ch recei v ab les ), t o s ecu re M ak er’ s p aym en tan d p erfo rm an ce o f t h i s No te, i n cl u d i n g , wi th o u t l i m i t at i o n , p aym en to f al l p ri nci p al an d i n t eres to n th i s No t e. M ak er h ereb y ag rees t o p erm i t Ho l d er t o m ak e reg u l ar au d i t s o f M ak er’ s acco un t s recei v ab l e b al an ces . M ak er ack n o wl ed g es an dag rees th atHo l der m ay fi le a UCC-1 Fi n an ci n g St at em en tt o p erfect Ho l d er’ s s ecu ri ty i n t eres ti n M ak er’ s acco u n t s recei vab l e. If an y o f t h e Ev en t s o f Defau l td es cri b edb el o w s hal l o ccu r, M ak er i m m ed i at el y s hal l g i v e t o Ho l d er an d p erm i tHo l der t o co l l ectal l acco u n t s recei vab l e t hen ex i s t in g o r th ereaft er ari si ng fro m M ak er’ s p ri v at e p ract i ce o f m ed i ci n e u n t il al l Ev en t s o f Defau l tare cu red , an d M ak er al s o s h al l co o perat e b y en d o rs i n g an dd el i v eri n g t o Ho l d er al l ch eck s an d o ther p aym en t s fro m M ak er’ s acco u n t s recei v ab l e.- 9

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[* 9 ] M ak er warran t s an drep res en t s t o Ho l d er th atM ak er wi l l n o tg ran t an y s ecu ri ty i n t eres t s i n o r as s i g n s u ch acco u n t s recei vab l e t o an y o th er p ers o n o r en t i ty

du ri n g th e t erm

o f t h i s No t e. M ak er fu rt h er warran t s an d rep res en t s t o Ho l d er t h atex cep tfo r t he s ecu ri ty i n t eres t g ran tedb y

M ak er t o (l i s th ere al l p ri o r h ol d ers o f a s ecu ri ty i n t eres t , i f an y , i n t h e acco u n t s recei v ab l e) _

_ _ __ _ _ _ _ [l eftb l an ki n th e p ro m is

s o ry n o t e t h ati s p art o f t h e reco rd ] s u ch acco u n t s recei v ab le p res en t ly are n o ts ub

jectt o an y

s ecu ri ty i n t eres to f an y

o th er cred i t o r. If atan y t im e du ri n g t h e t erm

o f t h i s No t e an y

o f t h e fo l l o wi n g ev en t s (each an “ Ev en to f Defau l t ”) s h al l o ccu r: (1 ) M ak er fai l s t o p ay an y i n t eres to r p ri n ci p al wh en du e h ereu n d er, an ds u ch fai l u re t o p ay i s n o tcu redwi th i n t en(1 0 ) d ay s aft er Ho l d er g i v es wri t t en n ot i ce t o M ak er o f s u ch fai l u re t o p ay ; (2 ) an y v ol u n t ary

o r i n v ol u n t ary

b an krup t cy , l iqu i d at i on , i n s ol v en cy , read ju s t m en to f d eb to r o ther s im il ar acto r p ro ceed i n g s h al l b e co m m en cedb y

o r ag ai n s t M ak er; (3 ) M ak er s h al l ap p l y

fo r, o r t h ere s h al l b e ap p o i nt eda recei v er, cu s t o d i an o r t ru st ee fo r al l o r a s ub s t an ti al p arto f M ak er’ s as set s ; (4 ) M ak er s h al l m ak e an as s i g n m en tfo r t he b en efi to f cred it ors ; (5 ) M ak er s h al l b e u n ab l e t o p ay i t s d eb t s g en eral ly

as th ey b eco m e due; o r (6 ) M ak er b reach es an y o f M ak er’ s rep res en t at io n s , warran t i es , o r co v en an t s ; th en , au t o m at i cal l y up o n th e o ccu rren ce o f (2 ), (3 ), (4 ) o r (5 ), an datth e el ect io n o f Ho l d er up o n the o ccu rren ce o f (1 ) o r (6 ), th e en ti re am o u n t o f u np ai di n t eres tan dp ri n ci pal h ereu n d er s h al l b eco m e due an dp ay ab l e i m m ed iat el y wi th ou td il i gen ce, p res en t m en t , p ro t es t , d em an d o r n ot i ce o f p ro tes t , d em an d , d i s h o n o r o r n o np ay m en t , al l o f wh i ch are ex p res s l y wai v edh ereb y . Pu rs uan tt o th e ag reem en twi th res p ectt o th e $ 14 6 ,5 0 0 t ran s fer t o p et i

t i on er, p et i t i o n er h adan u n co n d i t i o n al o b l i g at i o n t o rep ay t o CM C t h e $ 1 4 6 ,5 0 0 th ati ttran sferred t o h i m . Th ato b l i g at i o n o f p et i t io n er was , h o wev er, s ub jectt o a
co n di t i o n s ub s equ en t . Th ati s t o s ay , i f p et it i on er wo rk ed i n CM C’ s m ed i cal p ract i ce fo r at l eas ts i x m on th s , CM C- 1 0 -

[* 1 0 ] ag ree[d ] t o fo rg i v e an dcan cel o ne thi rti eth (1 / 3 0 th ) o f Ph y si ci an ’ s Lo an Rep aym en tAm o u nt[$ 1 4 6 ,5 00 ] * * * fo r each cal en d ar m o nt h aft er t he en d o f t h e Gu aran t ee Peri o d[s i x m o n th s ] th atPh y s ici an [p et i t i o n er] (1 ) rem ai n s i n th e fu l l -t i m e p ract i ce o f m ed i ci ne i n th e Co m m un i ty an dg eo g rap h i c area s erv ed b y Ho s p it al , (2 ) m ai nt ai n s M ed i cal St aff m em

bers h i p an dp ri v il eg es i n g o o d s tan d i n g atHo s p i

t al , an d(3 ) rem ai n s av ai l ab le fo r em erg en cy ro o m co v erag e fo r p at i en t s o f Ho s p i t al ’ s em erg en cy ro o m . Am o u n t s fo rg i v en , i f an y , (as wel l as an y i m

p u t edi n co m e as req ui redb y l aw) wi ll b e rep o rt edo n Fo rm 1 09 9 as p res cri b edb y

th e In t ern al Rev en ue Serv i ce. Am o un t s p ai d i n erro r t o th e p h y s i ci anwi l l n o t b e s ub jectt o fo rg i ven es s . Pu rs uan tt o th e p h y s i ci an ’ s recru it in g ag reem en t , i n p art i cu l ar t he co m p en s at i o n g u aran t ee wi th fo rg i ven es s ag reem en tan d the p ro m i s s ory n o t e t h atwere p arto f t he p hy s i ci an ’ s recru i t i n g ag reem en t , i n 2 0 0 9, du ri n g th e fi rs t s i x m o n th s o f p et i t i o n er’ s em

p lo ym en t wi th CM C, CM C l oan ed$ 1 4 6 ,5 00 t o h i m . Pet i t i o n er d i d

n o ti n cl u d e t h e $ 1 4 6 ,5 00 l o an i n g ro s s i n co m e fo r p et it io n ers ’ t ax ab l e y ear 2 0 0 9 , an d th us th atam o u n twas n o tt ax edo n d i s b urs em en tt o h im du ri n g thaty ear. Du ri n g 2 0 0 9 , CM C p ai dp et i t i o n er t o t al n on em p l o y ee co m

p en s at i o n o f $ 4 ,8 7 6 an drep o rt edth atn o n em p l o y ee co m

p en s at i o n i n Fo rm

1 0 99 -M ISC t h ati t i s su edt o h i m

fo r th aty ear. CM C d i d n o ti n cl u d e t h e $ 1 46 ,5 0 0 l oan i n Fo rm 1 0 9 9

- M ISC o r i n an o th er i nfo rm at i o n ret u rn th ati ti s su edt o p et i t i o n er fo r h i s t ax ab l e y ear 2 0 0 9
.- 1 1 -

[* 1 1 ] Du ri n g 2 0 1 0 , CM C p ai dp et i t i o n er t o t al n on em p l o y ee co m

p en s at i o n o f $ 5 3 ,4 1 4 an drep o rt edthatn o n em p l o y ee co m

p en s at i o n i n Fo rm

1 09 9 -M ISC t h ati t i s su edt o h i m

fo r th aty ear. In Feb ru ary

2 0 1 1 , p et i t i o n er t erm i n at edh is em pl o ym en twi th CM C. Du ri n g 2 0 1 1 an d2 0 1 2 , CM C d idn o tp ay p et i ti o n er an y

n o n em p l o y ee
co m p en s at i o n . CM C d i dn o ti ss u e t o p et it i on er Fo rm 1 0 99 -M ISC fo r h i s t ax ab l e y ears 2 0 1 1 o r 2 0 1 2
. Pu rs uan tt o th e p h y s i ci an ’ s recru it in g ag reem en t , i n p art i cu l ar t he co m p en s at i o n g u aran t ee wi th fo rg i ven es s ag reem en tan d the p ro m i s s ory n o t e t h atwere p arto f t he p hy s i ci an ’ s recru i t i n g ag reem en t , du ri n g 2 0 1 2 p et i t i o n er m ad e p ay m en t s t o CM C t ot al i n g $ 4 6 ,8 8 3 .5 4 (p et i t i o n er’ s rep aym en ts ) i n rep aym en to f t h e
rem ai n i n g b al an ce o f t h e $ 1 4 6 , 5 0 0 th atCM C h adl o an edt o h im i n 2 0 0 9. Pet i t i o ners i n cl u d edSch edu l e C, Pro fi to r Lo s s Fro m Bu s i n es s (2 0 1 2 Sch edu l e C), wi th th ei r t ax retu rn fo r t h ei r t ax ab l e y ear 2 0 1 2 (2 0 1 2 ret u rn ). In th e 2 0 1 2 retu rn , p et i t io n ers s ho wed“ To t al Tax ” o f $ 3 1,1 9 7 . In the 2 0 1 2 Sch edu l e C, p et i t i o n ers cl ai m edp et i t i o n er’ s rep aym en t s o f $ 4 6,8 8 3 .5 4 as “ Oth er ex p en s es ” (cl ai m ed2 0 1 2 Sch edul e C rep aym en tex p en s es ).- 1 2 -

[* 1 2 ] Res p o n d en ti s su eda n o t i ce o f d efi ci en cy t o p et i t i o n ers fo r t h ei r t ax ab l e y ear 2 0 1 2 (n o t i ce). In th atn o t i ce, res p o n d en t d et erm i n edt o d i s al l o w the cl ai m ed2 0 1 2 Sch edu l e C rep aym en tex p en s es o f $ 4 6 ,8 8 3.5 4 . Res p o nd en t al s o d et erm in edi n th e n o ti ce t h atp et it i o n ers are l iab l e fo r t h ei r t ax ab l e y ear 2 0 1 2 fo r t h e accu racy rel at ed p en al ty

u n d er s ect io n 6 6 6 2 (a).

OPINION Pet i t i o ners b ear t h e b u rd en o f es t ab l i s h i n g th atthe d et erm in at io n s i n t h e
n o t i ce are erro neo u s . See Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3). M o reo v er, d edu ct i on s are a m at t er o f l eg is lat i v e g race, an dp et i t io n ers b ear t he b u rd en o f es t ab l i s h i n g th atth ey are en t i t l edt o an y

d edu ct i o n cl ai m ed

. See INDOPCO, In c. v . Co m m is s i o n er, 5 0 3 U.S. 7 9 , 8 4 (1 99 2 ). Th atth i s cas e was
s ub m i t t edfu l l y

s t ip u l at ed u n d er Ru l e 1 2 2 d o es n o tch an ge p et i t i o n ers ’ b u rd en o f p ro o f o r t h e effect o f a fai l u re o f p ro o f. See Ru le 1 2 2 (b ); Bo rch ers v . Co m m i s s i on er, 9 5 T.C. 8 2 , 9 1 (1 9 9 0 ), aff’ d, 9 43 F.2 d 2 2 (8 th Ci r. 1 9 9 1 ). W e tu rn fi rs tt o wh et h er p et i t i o n ers are en ti t l edt o the cl ai m ed2 0 1 2 Sch ed

u l e C rep aym en t ex p en s es o f $ 4 6 ,8 8 3 .5 4. Th e res o lu t i o n o f t h ati ss u e d ep en d s o n wh et h er t h e $ 1 4 6 ,5 0 0 th atCM C t ran s ferred t o p et i t i o n er du ri n g 2 0 0 9 p u rs u an tt o th e p h y s i ci an ’ s recru i t i n g ag reem en tco n s ti tut es a l o an . Th ati s b ecau s e, as p et i t i o n ers ackno wl ed g e, a t ax p ay er i s n o ten t i t l edt o d edu ctth e rep aym en to f a- 1 3 -

[* 1 3 ] l o an . See Bren n er v . Co m m i s s i o n er, 6 2 T.C. 8 7 8 , 8 8 3 (1 9 7 4 ); Crawfo rd v . Co m m i s s i o n er, 1 1 B.T.A. 1 2 9 9 , 1 3 0 2 (1 9 28 ). Co n seq u en t l y , p et i ti o n ers d o n o t d i s p u t e t h ati f we were t o fi n d th atth e $ 1 4 6 ,5 0 0 th atCM C t ran s ferred t o p et i t i on er du ri n g 2 0 0 9 co n s t i tu tes a l o an , th ey wo u l dn o tb e en t i tl ed t o t h e cl ai m ed2 0 1 2 Sch edu l e C rep aym en tex p en s es o f $ 4 6 ,8 8 3.5 4 . Th ey d o d i s p u t e, h o wev er,
res p o n d en t’ s p o s i t i o n t h atth e $ 1 4 6 , 5 0 0 i n qu es t i on co n s t i tu tes a l o an . Th e d et erm i n at i o n o f wh et h er a t ran s fer o f fu n d s co n s t i tu t es a l o an i s a qu es ti o n o f fact

. See, e.g ., Fi s h er v . Co m m i s s io n er, 5 4 T.C. 9 0 5, 9 0 9 (1 9 7 0). In
o rd er fo r a t ran s fer o f fu n ds t o co n s ti tu t e a l o an , atth e t i m e t h e fu n d s are t ran s ferred th ere m

u s tb e an u n co n d i t i o n al o b li g at i o n (i .e., an o b l i g at i o n th ati s n o t
s ub jectt o a co n di ti o n p reced en t ) o n th e p arto f t he t ran sferee t o rep ay , an dan
u n co nd i t io n al i n t en t i o n o n th e p arto f th e t ran s fero r t o s ecu re rep aym en to f, th e fu n d s. See, e.g ., Haag v . Co m m i s s i o n er, 8 8 T.C. 6 04 , 6 16 (1 9 87 ), aff’ dwi th o u t p ub l i s h edo p i n i o n, 8 5 5 F.2 d8 5 5 (8 th Ci r. 1 9 88 ); Di ck in s o n v . Co m m i ss i o n er, T.C. M em o . 2 01 4 -1 3 6 , at* 1 0 -* 1 1
. Wh et h er a t ran s fer o f fu nd s co ns t i tu tes a l o an m ay b e i nferred fro m fact o rs
s u rro u n d i n g th e t ran s fer, i n cl u d i n g th e ex i s ten ce o f a d eb ti ns tru m en t, th e ex i s t en ce o f a wri t t en l o an ag reem en t , th e p ro v is io n o f co l l at eral s ecu ri n g th e p u rp o rt edl o an , th e accru al o f i n teres t o n th e p u rp o rt edl o an , th e s o l v en cy o f th e- 1 4 -

[* 1 4 ] p u rp o rt edb o rro wer at th e t i m e o f t h e p u rp o rt edl o an , th e treat m en to f t h e tran s ferred fu n d s as a l o an by th e p u rp o rt edl en der an dth e p urp o rt ed b o rro wer, a d em an dfo r rep aym en to f t h e t ran s ferred fu n d s , an d t h e rep aym en to f t h e t ran s ferred fu nd s . See, e.g ., Haag v . Co m m i ss i o n er, 8 8 T.C. at6 1 6 n .6 ; Cl ark v . Co m m i s s i o n er, 1 8 T.C. 7 80 , 7 8 3 (1 9 5 2 ), aff’ d p er cu ri am , 2 0 5 F.2 d3 5 3 (2 dCi r. 1 9 5 3 ); M cFad den v . Co m m i s s i o n er, T.C. M em o . 2 0 0 2 -1 6 6, 2 0 0 2 W L 1 4 2 4 6 3 7 , at* 8
. Vari o u s fact ors s u rro u nd i n g th e t ran s fer du ri n g 2 0 0 9 b y CM C t o p et i t i o n er
o f $ 1 46 ,5 0 0 i n di cat e t h at th attran s fer o f t h o se fu nd s co n s t i tu t es a l o an , i ncl u d i n g th e fo l lo wi n g : p et i t i o n er ex ecu t eda p ro m i s s ory n o t e i n wh i ch h e ag reedt o rep ay t o CM C al l am o u n t s t h atCM C t ran s ferred t o h i m an dthatth e co m

p en s at i o n g u aran tee wi th fo rg i v en es s ag reem en treferred t o as th e “ Lo an Rep aym en t Am o u nt ” (i .e., $ 1 4 6 , 50 0 ); th ere was a l o an ag reem en twi th res p ectt o CM C’ s tran s fer t o p et i t i o n er o f t h e $ 1 4 6 ,5 0 0 i n qu es t i o n th atco m p ri s ed the recru i t i n g ag reem en t , the co m

p en s at i on g u aran t ee wi th fo rg i v en es s ag reem en t , an dth e p ro m i s s o ry

n o t e; p et it i o n er ag reedt o p ay i n t eres to n th e $ 14 6 , 5 0 0 th at h e recei v ed fro m CM C atth e rat e s p eci fi edi n th atn o t e; p et i t i o n er ag reedt o s ecu re t h e rep aym en to f t h e $ 1 4 6 ,5 0 0 l o an an dthe i n t eres tth ereo n b y g ran t i n g CM C a
s ecu ri ty i n t eres ti n al l acco un t s recei v ab l e o f h i s p ri v at e p ract i ce o f m ed i ci ne;- 1 5 -

[* 1 5 ] p et i t i o n er h adth e ab i l i ty t o rep ay th e $ 1 4 6 ,5 0 0 thatCM C t ran s ferred t o h i m ; p et i t i o n er i n factrep ai dth e $ 1 46 ,5 0 0 ; an d p et i t i o n er an dCM C t reat edth e $ 1 4 6 ,5 0 0 th atCM C t ran s ferred t o p et i ti o n er as a l o ani n t h atCM C d i d n o t i n cl u d e th e $ 1 46 ,5 0 0 l o an i n Fo rm 1 0 9 9 -M ISC o r i n an y

o ther i nfo rm at i o n retu rn th ati t i s su edt o p et i t i o n er fo r h i s t ax ab l e y ear 2 0 0 9 an dp et i t i o n er d i dn o ti n cl ud e t h e $ 1 4 6 ,5 0 0 i n g ro s s i nco m e fo r p et i t i o n ers ’ t ax ab l e y ear 2 00 9
. In th e face o f t h e v ari o u s fact o rs s et fo rt h ab ov e, wh i ch i nd i cat e t h atth e $ 1 4 6 ,5 0 0 tran s fer t o p et i t i o n er b y CM C co n s t i tu t es a l o an , p et i t i o n ers n o n et h el es s t ak e t h e p o s i t i o n th atth e $ 1 4 6 ,5 0 0 th atp et i ti o n er “ recei v ed* * * fro m CM C
s h o u ldb e co n s i d eredan ad v an ce p aym en to f Dr. Sal l o u m ’ s s al ary m ad e p urs u an t t o the Ph y s i ci an Recru i t i n g Ag reem en t ”, n ota l oan . W e fi n dp et i t io n ers ’ p o s i t i o n th atth e $ 1 4 6 , 5 0 0 th at CM C t ran s ferred t o p et i ti o n er du ri n g 2 0 0 9 d o es n ot
co n st i tu t e a l o an t o b e i n co n s i s t en twi th t h e fi rs t s ti p u l at i o n o f fact s . Inth at
s t ip u l at i o n , p et i ti o n ers an dres p o n d en tag reed , i n t er al i a, t hat“ CM C ag reedt o l o an M r. Sal l o u m

$ 1 4 6 ,5 0 0 ” an dth at“ M r. Sal l o um recei v edthe $ 1 4 6 ,5 00 l o anwi t h i n th e fi rs ts i x m o n th s o f h is em p l o ym en tatCM C, wh i ch o ccu rredi n 2 0 0 9 .” 4 In s up p o rto f t h ei r p o s it i o n , p et i t i o n ers co n t en dth at“ th ere i s n o u n co n d i

t i on al o b l i g at i on [i m

p o s edo n p et i t i o n er] t o rep ay th e am o u n t[i .e., $ 1 4 6,5 0 0 ]

4 See s up ra n o t e 3
.- 1 6 -

[* 1 6 ] ex ten d edt o ” h i m . Th ati s b ecau se, acco rd i n g t o p et i t i on ers , “ [a] n y rep aym en t s o f * * * [t h e $ 1 4 6 ,5 0 0 ] wo u ldo n l y b eco m e du e i f t he Pet it i on er[]

m at eri al l y

b reach edth e Ph y s i ci an Recru i t i n g Ag reem en t .” As we u nd ers t an dth e
co re o f p et it i on ers ’ arg u m en t i n s up po rto f t h ei r p o si ti o n th atth e $ 14 6 ,5 0 0 t h at CM C tran s ferred t o h i m

d o es n o tco n s t i tu t e a l o an , p et i t i o n ers are co n t en d i n g th at p et i t i o n er’ s o b li g at i o n t o rep ay th e $ 1 4 6 , 5 00 th at CM C tran sferred t o h im was
s ub jectt o a co n di ti o n p reced en tan dco n s equ en t l y h i s o b l i g at i o n t o rep ay th at
am ou n tt o CM C was n o t u nco n d i t i o n al

. In ad v an ci n g th ei r p o s i t i o n , p et it i on ers rel y o n th e fo l l o wi n g l an g u ag e i n th e
co m p en s at i o n g u aran t ee wi th fo rg i v en es s ag reem en t : H. An y fai l u re b y

Ph y s i ci an t o co m

p l y wi th th e t erm s o f Parag rap h E o f t h i s Ad d en du m

s h al l b e co ns i d ered a m at eri al b reach o f t h i s Ad d en du m

an dth e Recru i t i n g Ag reem en t b y Ph y s i ci an an ds h al l au th ori ze Ho s p it al , ati t s o p t i o n , t o p u rs ue t h e rem ed ies d es cri b edi n th e M at eri al Breach Sect i o n o f t h e Recru i ti n g Ag reem en t. Acco rd in g t o p et it i on ers , “ [w] h en Dr. Sal l o u m t erm i n at edh i s em

p l oym en twi th CM C, an y

u n earn edad v an ced am o u n t s b ecam e du e t o CM C.” Pet i t i o ners ’ rel i an ce o n on l y Parag rap h H. i n th e co m p en s at i o n g u aran t ee wi th fo rg i v en es s ag reem en t i g n o res o th er p ert i n en t p ro v i s io n s i n th e ag reem en t wi th res p ect t o th e $ 1 4 6 ,5 0 0 tran s fer t o p et i t i o n er. Fo r ex am p l e, t h e co m

p en s at io n g u aran tee wi th fo rg i v en es s ag reem en tal s o co n t ai n edth e fo l l owi n g p ro v i s i o n s :- 1 7 -

[* 1 7 ] A. Ho s p i t al [CM C] h ereb y ag rees t o l o an Ph y s i ci an [p et i t i o n er] cert ai n am ou nt s o f m o n ey wh i ch Ho s p i t al s h al l ad van ce as a g u aran t ee o f co m

p en sat io n fo r Ph y s i ci ant o t al i n g a m ax i m u m o f $ 1 4 6 ,5 0 0.0 0 (h erei n aft er t h e “ Guaran t ee Am ou n t”). * * *

* * * * * * * E. Ph y s i ci an ag rees t o act i v el y en gag e i n th e fu l l-t i m e p ract i ce o f m ed i ci n e i n th e Co m

m u ni ty an dg eo g rap h i c area s erv edb y Ho s p i t al , t o b i l l al l p at i en t s an dth i rd -p art y p ay o rs p ro m

p t l y fo r al l s erv i ces ren d ered , an dt o u s e h is /h er b es teffo rt s t o co l l ectal l p at i en tacco u n t s . Ho s p i t al s h al l h av e t he ri g h tt o rev i ew an dau d i tPh y s i ci an ’ s b oo k s an dreco rd s fo r wh at ev er p eri o do f t im e i s n eces s ary t o as s u re co m p li an ce wi th the Recru i t i n g Ag reem en tan dan y Ad den da t h eret o . F. Atth e en d o f t h e Gu aran t ee Peri o d , th e s u m o f al l Gu aran t ee Paym en t s m ad e b y

Ho sp i t al t o Ph y si ci andu ri n g t h e Gu aran t ee Peri od , n o to th erwi s e rep ai d o r reco up edp u rs u an tt o an y o th er p ro v i s i o n i n th i s Ad d en du m

[co m p en s at i o n g u aran t ee wi th fo rg i v en es s ag reem en t ] , s h al l b e cal cu l at ed . Th i s am ou n trep res en ts th e “ Lo an Rep aym en tAm o u n t ” wh i ch s h al l b e du e an dp ay ab l e b y Ph y s i ci an as ev i d en cedb y

th e at t ach edPro m i ss o ry

No t e (Ex h i b i t “ A ”) ex ecu tedb y Ph y s i ci an . Al th o u g h n o ti n cl u d edi n th e Lo an Rep aym en tAm o un t , ad d i ti o n al am o u n ts m ay

b e du e fro m

Ph y s i ci an t o Ho s p i t al i n acco rd an ce wi th the t erm s o f t h e Ad d en d a at t ach edan dm ad e a p art o f t h e Recru i t i n g Ag reem en t . In teres to n th e Lo an Rep aym en t Am o u n t wi l l b eg i n t o accru e at th e en do f t he Gu aran t ee Peri o d

. Ho wev er, i n an effo rtt o en co urag e p ro m p tp aym en t, i n teres twi l l b e fo rg iv en o n an y

am o u n ts rep ai dwi th in s i x (6 ) m o n th s o f th e en do f th e Gu aran t ee Peri o d . Am o u n t s s o fo rg i v en , i f an y , (as wel l as an y i m p u t edi nco m e as req u i redb y l aw) wi l l b e rep ort edo n Fo rm 1 0 9 9 as p res cri b ed by

th e In t ern al Rev en u e Serv i ce. G. No twi th s t an di n g , i n reco g n i t i o n o f t h e fact th atPh y si ci an i s es t ab l i sh i ng h is /h er fu l l -t i m e m ed i cal p ract i ce i n th e Co m m un i ty an d g eo g rap h i c area s erv edb y Ho s p it al an dt o en co u rag e Ph y s i ci an t o rem ai n i n the Co m

m u n i ty an d g eo g rap h i c area s erv ed b y Ho s p i t al- 1 8 -

[* 1 8 ] b ey o n dth e Gu aran t ee Peri o d, Ho s p i t al ag rees t o fo rg i v e an d can cel o ne thi rti eth (1 / 3 0 th ) o f Ph y s i ci an ’ s Lo an Rep aym en tAm o un tas cal cu l at edab o ve t o Ho s pi t al fo r each cal en d ar m o n th aft er th e en do f th e Gu aran t ee Peri o dthatPh y s i ci an (1 ) rem ai n s i n the fu ll -t i m e p ract i ce o f m ed i ci n e i n the Co m m u n it y an dg eo g rap hi c area s erv edb y Ho s p i t al , (2 ) m ai n t ai n s M ed i cal St aff m em b ers hi p an d p ri v i l eg es i n g o o ds t an d in g atHo s p i t al , an d(3 ) rem ai n s av ai l ab l e fo r em erg en cy ro o m co v erag e fo r p at i en t s o f Ho s p i t al ’ s em erg en cy ro o m . Am o u n ts fo rg iv en , i f an y , (as wel l as an y i m p u t edi n co m e as req u iredb y l aw) wi l l b e rep ort ed o n Fo rm 1 0 9 9 as p res cri b edb y th e In tern al Rev en u e Serv i ce. Am o un t s p ai di n erro r t o th e p h y s i ci an wi l l n o tb e s ubjectt o fo rg iv en es s . W e h av e fo u n d t h atp u rs u an tt o th e ag reem en t wi th res p ect t o th e $ 1 4 6 ,5 0 0 tran s fer t o p et i t i o n er p et i t i o n er h adan u n co n d i t i on al o b l i g at i o n t o rep ay t o CM C th e $ 1 46 ,5 0 0 th at i ttran sferred t o h i m . Th ato b l i g at i on o f p et i t i o ner was , h o wev er, s ub

jectt o a co n di t i o n s ubs equ en t . Th at i s t o s ay , i f p et it i on er wo rk edi n CM C’ s m ed i cal p ract i ce fo r atl eas ts i x m o nt hs , CM C ag ree[d ] t o fo rg i v e an dcan cel o ne thi rti eth (1 / 3 0 th ) o f Ph y si ci an ’ s Lo an Rep aym en tAm o u nt[$ 1 4 6 ,5 00 ] * * * fo r each cal en d ar m o nt h aft er t he en d o f t h e Gu aran t ee Peri o d[s i x m o n th s ] th atPh y s ici an [p et i t i o n er] (1 ) rem ai n s i n th e fu l l -t i m e p ract i ce o f m ed i ci ne i n th e Co m m un i ty an dg eo g rap h i c area s erv ed b y Ho s p it al , (2 ) m ai nt ai n s M ed i cal St aff m em

bers h i p an dp ri v il eg es i n g o o d s tan d i n g at Ho s p i t al , an d(3 ) rem ai n s av ai l ab l e fo r em erg en cy ro o m co verag e fo r p at i en t s o f Ho s p i t al ’ s em erg en cy ro o m . Am o u n t s fo rg i v en , i f an y , (as wel l as an y i m

p u t edi n co m e as req ui redb y l aw) wi ll b e rep o rt edo n Fo rm 1 09 9 as p res cri b edb y

th e In t ern al Rev en ue Serv i ce. Am o un t s p ai d i n erro r t o th e p h y s i ci anwi l l n o t b e s ub jectt o fo rg i ven es s .- 1 9 -

[* 1 9 ] Bas edup on o ur ex am i n at i o n o f t h e en t i re reco rdb efo re u s , we fi n dth at p et i t i o n ers h av e fai l ed t o carryth ei r b urd en o f es t ab l is h i n g thatth e $ 1 4 6 ,5 0 0 th at CM C tran s ferred t o p et i t i o n er du ri n g 2 0 0 9 was n o ta l o an . Pet i t i o n ers d o n o t d i s p u t e t h ati f we were t o fi n d th atth e $ 1 4 6 ,5 0 0 th atCM C t ran s ferred t o p et i t i on er du ri n g 2 0 0 9 co n s t i tu tes a l o an , th ey wo u l dn o tb e en t i tl ed t o t h e cl ai m ed2 0 1 2 Sch edu l e C rep aym en tex p en s es o f $ 4 6 ,8 8 3.5 4
. W e ad dres s n o wth e accu racy -rel at edp en al ty u n d er s ect i o n 6 6 62 (a) t h at
res p o n d en t d et erm i nedi n th e n o t i ce. Th ats ect i o n i m p o s es an accu racy -rel at ed p en al ty o f 2 0 p ercen to f t h e u n d erp aym en tt o wh i ch s ect io n 6 66 2 ap p l i es . Sect io n 6 6 6 2 ap p l i es t o th e p o rt i o n o f an y u n d erp aym en t wh i ch i s at tri b u t ab l e t o , i n t er al ia, (1 ) n eg l i g en ce o r d i s reg ardo f ru l es o r reg u l at i o n s, s ec. 6 6 6 2 (b )(1 ), o r (2 ) a s ub

s t an t ial u n d ers t at em en to f t ax , s ec. 6 6 6 2(b )(2 ). Th e t erm “ n eg l i gen ce” i n s ect i o n 6 6 6 2(b )(1 ) i n cl u d es an y fai l ure t o m ak e a
reas on ab l e at t em

p tt o co m p l y wi t h th e Co d e. Sec. 6 66 2 (c). Neg l i g en ce h as al s o b een defi n edas a fai l u re t o d o wh ata reas o nab l e p ers o n wo u l d d o u n d er th e ci rcu m s t an ces . Leu h s l er v . Co m m i s s i o n er, 9 6 3 F.2 d9 0 7, 9 1 0 (6 th Ci r. 1 9 9 2 ), aff’ g T.C. M em o . 1 9 9 1 -1 7 9 ; An t o n i d es v . Co m m is si o n er, 9 1 T.C. 6 86 , 6 9 9 (1 9 8 8), aff’ d , 8 9 3 F.2 d6 5 6 (4 th Ci r. 1 9 9 0). Th e t erm “ n eg l ig en ce” al so i n cl u d es
an y fai l u re b y

th e t ax p ay er t o k eep ad equat e b o o ks an dreco rd s o r t o s ub s t an t i at e- 2 0 -

[* 2 0 ] i t em s p ro p erl y . Sec. 1 .6 6 6 2 -3 (b )(1 ), In co m e Tax Reg s . Th e t erm

“ d i sreg ard ” i n cl ud es an y

carel es s , reck l es s , o r i n t en t i o n al d i s reg ard . Sec. 6 6 6 2 (c). Fo r p u rp o s es o f s ect i on 6 6 6 2 (b )(2 ), an u n ders t at em en t i s eq u al t o th e ex ces s
o f t h e am o u nto f t ax req u iredt o b e s h o wni n t h e t ax return o v er th e am o u n to f t ax
s h o wni n the ret u rn . Sec. 6 6 6 2(d )(2 )(A). An u n d ers t at em en ti s s ub s t an t i al i n th e
cas e o f an i n d i v i dual i f the am ou n to f t h e u n ders t at em en tfo r th e t ax ab l e y ear
ex ceed s t h e g reat er o f 1 0 p ercen to f t h e t ax req u i red t o b e s h own i n th e t ax retu rn fo r t h aty ear o r $ 5 ,0 0 0 . Sec. 6 6 6 2(d )(1 )(A). Th e accu racy -rel at edp en al ty u n der s ect i o n 6 6 6 2 (a) d o es n o tap p l y t o an y p o rt i on o f an u n d erp aym en ti f i ti s s h o wnth atthere was reas o n ab l e cau s e fo r, an d th atth e t ax p ay er act edi n g o odfai th wi th res p ectt o , s u ch p o rt i o n . Sec. 6 6 6 4 (c)(1 ). Th e d et erm i n at i o n o f wh et h er t h e t ax p ay er act edwi th reas o n ab l e
cau s e an d i n g oo dfai th d ep en d s o n al l th e p ert i nen t fact s an dci rcu m s t an ces , i n cl u d i n g th e t ax p ay er’ s effo rt s t o as s es s t h e t ax pay er’ s p ro p er t ax l i ab i l i ty , th e kn o wl ed g e an d ex p eri en ce o f t h e t ax p ay er, an dth e rel i an ce o n th e ad v ice o f a p ro fes s i on al , s u ch as an acco u n t an t . Sec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . Rel i an ce o n th e ad v i ce o f a p ro fes s i o n al m ay d em o n s trat e reas on ab le cau se
an d g o o dfai th i f, u n der al l th e ci rcu m s t an ces , s u ch rel i an ce was reas o n ab l e an d th e t ax p ay er act edi n g o odfai th . Id . Inth i s co n n ect i o n , ad v ice i s d efi n ed as a- 2 1 -

[* 2 1 ] co m

m u n i cat i on th atrefl ect s the ad v i s er’ s an al y s i s o r co ncl u s io n . W oo d s u m
v . Co m m i s s i o n er, 1 3 6 T.C. 5 85 , 5 9 3 (2 0 1 1); s ee s ec. 1 .6 6 6 4 -4 (c)(2 ), In co m e Tax Reg s. M o reo v er, i n o rd er fo r a t ax p ay er t o rel y reas o n ab l y

up o n ad v i ce s o as p o s s i b l y t o n eg at e a s ect i o n 6 6 6 2 (a) accu racy -rel at edp en al ty d et erm i n edb y th e Co m m i s s i o ner, th e t ax p ay er m

u stp ro v e b y

a p rep o nd eran ce o f t h e ev i d en ce t h at the t ax p ay er m eet s each req u i rem en t o f t h e fo l lo wi n g three-p ro n g t es t : (1 ) Th e ad v i s er was a co m p et en t p ro fes s i on al wh o h ads u ffi ci en t ex p ert i s e t o ju s t i fy

rel ian ce, (2 ) t h e t ax pay er p ro v i d edn eces s ary an d accu rat e i nfo rm at i o n t o th e ad v i s er, an d (3 ) t h e t ax p ay er act u al l y rel i edi n g o o dfai th o n th e ad v is er’ s ju dg m en t
. * * * Neo nat ol o gy

As so cs ., P.A. v . Co m

m i ss i on er, 1 1 5 T.C. 4 3 , 9 9 (2 0 0 0 ), aff’ d , 2 9 9 F.3 d2 2 1 (3 dCi r. 2 0 02 ). A t ax p ay er’ s du ty

t o fi l e an accu rat e t ax return g en eral l y m ay n o tb e
av o id ed b y

th e t ax p ay er’ s cl ai m

th ath e o r s h e rel i edo n a t ax return p rep arer. See M et ra Ch em

Co rp . v . Co m

m i s s i o n er, 8 8 T.C. 6 5 4 , 6 62 -6 6 3 (1 9 8 7 ). M o reo v er, a t ax p ay er’ s u n co n d i ti o n al rel i an ce o n a cert i fi edp ub l i c acco u nt an t(C.P.A.) d o es
n o t , s t an d i n g al o n e, co n st i tu t e reas o n ab l e rel i an ce i n g oo d fai th fo r p u rp o s es o f
s ect i on 6 6 6 4 (c)(1 ) an d th e reg u l at i o n s thereu n d er. See St ou g h v . Co m m i s s i o n er, 1 4 4 T.C. 3 0 6 , 3 2 3 (2 0 1 5 ). A t ax p ay er h as an o bl i g at i o n t o ex erci s e “ [d ] i l i g en ce
an d p ru d en ce.” Id . Inad d i t i o n, a t ax p ay er h as a du ty t o read a t ax retu rn th ata C.P.A. p rep ares fo r t he t ax p ay er. See i d. Ev eni f a t ax p ay er p ro v i d edal l th e- 2 2 -

[* 2 2 ] i n fo rm at i o n n eces saryt o en ab l e a C.P.A. t o p rep are an accu rat e t ax retu rn , th e t ax p ay er s t i l l h as a du ty t o readth e t ax retu rn an dm ak e s u re t h ati t i s accu rat e. See M ag il l v . Co m

m i s s i o n er, 7 0 T.C. 4 6 5 , 4 7 9 -4 8 0 (1 9 7 8), aff’ d, 6 5 1 F.2 d1 2 3 3 (6 th Ci r. 1 9 8 1 ). A t ax pay er’ s rel i an ce o n a t ax retu rn p rep arer wi th co m p l et e i n fo rm at i o n reg ard i n g a t ax p ay er’ s b u s i n es s act i v i t i es d oes n o tco ns t i tu te
reas on ab l e cau s e i f t h e t ax pay er’ s cu rs o ry rev i ew o f t h e t ax retu rn wo u l dh av e
rev eal ederro rs . See M etra Ch em Co rp . v . Co m

m is si o n er, 8 8 T.C. at6 6 2. Fu rt h erm o re, t he m ere fact thata C.P.A. p rep areda t ax return d o es n o tm ean th at h e o r s h e o p in edo n an y

o r al l o f t h e i tem s rep ort edi n th atretu rn . See Neo nat ol o gy

As so cs ., P.A. v . Co m

m i ss i on er, 1 1 5 T.C. at1 00
. Res p o n d en tb ears th e b u rd en o f p ro du ct i o n wi th res p ectt o th e accu racy rel at ed p en al ty

u n d er s ect io n 6 6 6 2 (a) t h at res p on d en td et erm i n edi n th e n o t i ce. See s ec. 7 4 9 1 (c); Hi g b ee v . Co m m i ss i o n er, 1 1 6 T.C. 4 3 8 , 4 4 6 -4 4 7 (2 0 0 1 ). To
s at i s fy res p o n d en t’ s b u rd en o f p ro du ct i o n , res p o n den tm u s tco m e fo rwardwi th

“ s u ffi ci en tev i d en ce i n d i cat i n g th ati ti s ap p ro p ri at e t o i m p o s e” t h e p en al ty . See Hi g bee v . Co m

m i ss i o n er, 1 1 6 T.C. at4 4 6 . Al th o ug h res p o n d en tb ears th e b u rd en
o f p ro du ct i o n wi th res p ectt o the accu racy -rel at edp en al ty u n der s ect i o n 6 6 6 2 (a),
res p o n d en t “ n eedn o ti n tro du ce ev i d en ce reg ard i n g reas on ab l e cau s e * * * o r
s i m i l ar p ro v i si o n s . * * * [T] h e t ax p ay er b ears th e b u rd en o f p ro of wi th reg ardt o- 2 3 -

[* 2 3 ] th o s e i s s u es .” Id . Onth e reco rdb efo re u s , we fi n d t h atres p o nd en th as carri ed res p o n den t ’ s b urd eno f p ro du ct i o n u n d er s ect i o n 7 4 9 1 (c) wi th res pect t o th e accu racy -rel at edp en al ty u nd er s ect io n 6 6 6 2 (a). It is res p o n d en t ’ s p o si t i on th atp et i t i o n ers are l i ab le fo r t h ei r t ax ab l e y ear 2 0 1 2 fo r t h e accu racy -rel at edp en al ty b ecau se t h ere i s a s ub s t an t i al u n d ers t at em en t
o f t ax fo r t h aty ear u n d er s ect i on 6 6 62 (b )(2 ). In th ei r 2 01 2 retu rn , p et it i on ers
s h o wed“ To t al Tax ” o f $ 3 1 ,1 9 7 . Inth e n o ti ce, res p o n d en t d et erm in eda d efi ci en cy
o f $ 1 6,9 2 3 . W e ag ree wi th res p o n d en tth at th ere i s a s ub s t an t i al u n d ers t at em en to f t ax fo r p et i t i o n ers ’ t ax ab l e y ear 2 0 1 2. See s ec. 6 6 6 2 (d )(1 ) an d(2 )(A). Pet i t i o ners arg ue, h o wev er, t h atthey are n o tl i ab le u n d er s ect i o n 6 6 6 2 (a) b ecau s e th ey

(1 ) are n o t“ wel l -v ers edi n th e nuan ces o f t h e t ax l aw s u rro un d i n g th ei r cl ai m ed d educt i o n s” an d(2 ) reas o n ab l y rel i ed o n th e ad vi ce an dth e g u i d an ce
o f t h ei r C.P.A. wh en th ey rep o rt edi n th ei r 2 0 1 2 retu rnth e cl ai m ed2 0 1 2 Sch edu l e C rep aym en tex pen s es o f $ 4 6,8 8 3
. 5 4 th atres p o n d en t d is al lo wed i n the n o t i ce. Acco rd in g t o p et it i on ers , u n d er s ect i o n 6 6 64 (c)(1 ) t h ere was reas o n ab l e cau s e fo r,
an d th ey act edi n g o o dfai th wi th res p ectt o , th e u n derp aym en tfo r t h ei r t ax ab l e y ear 2 0 1 2
.- 2 4 -

[* 2 4 ] Pet i t i o ners ’ 2 0 1 2 retu rn i s n o tp arto f t he reco rd

. 5 W e th u s d o n o tkn o w wh et h er p et i ti o n ers ret ai n eds o m eo n e t o p rep are o r as si stth em i n th e p rep arat i o n
o f t h at retu rn , l et al o n e wh et h er an y p ers o n th atthey

m ay h av e ret ai n ed was a C.P.A. M o reo v er, th e reco rdi s d ev o i do f ev i d en ce reg ard i n g wh at , i f an y , i n fo rm at i o n th ey

g av e t o an y C.P.A. th atth ey m ay h av e ret ai n edan d wh at , i f an y , ad v ice an y

s u ch C.P.A. m ay

h av e g i v en th em

wi th res p ectt o th e cl ai m ed2 0 1 2 Sch edu l e C rep aym en tex p en s es . See Neo nat o l o g y As s o cs ., P.A. v . Co m

m i s s i o n er, 1 1 5 T.C. at 9 9
. Bas edup on o ur ex am i n at i o n o f t h e en t i re reco rdb efo re u s , we fi n dth at p et i t i o n ers h av e fai l ed t o carryth ei r b urd en o f es t ab l is h i n g thatth ere was
reas on ab l e cau s e fo r, an d t h atth ey act edi n g o o dfai th wi th res p ectt o, the

u n d erp aym en t fo r t h ei r t ax ab l e y ear 2 0 1 2 . Onth atreco rd , we fi n dth atp et i t i o n ers h av e fai l edt o carry th ei r b u rd en o f es t ab l i s h in g th atth ey are n o tl i ab l e fo r t h ei r t ax ab l e y ear 2 01 2 fo r t h e accu racy -rel at edp en al ty b ecau s e o f a s ub st an t i al

u n d ers t at em en to f t ax u n d er s ect i o n 6 6 6 2 (b )(2 ). 6

5 Th e reco rdal s o i s d ev o i do f ev i d en ce wi th res p ectt o the p rep arat io n o f p et i t i o n ers ’ 2 0 12 retu rn .

6 Res p o n d en targ u es i n th e al t ern at i v e t h atp et i t i o n ers are l i ab l e fo r t h ei r t ax ab l e y ear 2 01 2 fo r t h e accu racy -rel at edp en al ty u n d er s ec. 6 6 62 (a) b ecau s e o f n eg li g en ce u n der s ec. 6 6 6 2 (b )(1 ). Becau s e we h av e al read y h el d th atp et i t i o n ers (co n ti n u ed ...)- 2 5 -

[* 2 5 ] W e h av e co n s id eredal l o f t h e co n t en ti o n s an darg u m en t s o f t h e p art i es th at
are n o td i s cu ss edh erei n , an dwe fi n dth em t o b e wi th o u tm eri t, i rrel ev an t , an d/ o r
m o ot
. To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t ered fo r res p o n den t
.

6 (...co n t in u ed ) are l i ab l e u n d er s ec. 6 66 2 (a) du e t o a s ub st an t i al u n ders t at em en to f t ax u n d er s ec. 6 6 6 2 (b )(2 ), we n eedn o t reach th atal t ern at i v e arg u m en t
.