T.C. M em o . 2 0 1 9 -9 8

UNITED STATES TAX COURT

KENT ALAN WEGENER AND SHINAE WEGENER, Pet i t i o n ers 1 v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 6 1 63 -1 6
. Fi l edAu gu s t 6 , 2 0 1 9
.

Ken tAl an W eg en er, p ro s e. Bri an A. Pfei fer an dSh aryn M . Ort eg a, fo r res po n d en t.

M EM ORANDUM FINDINGS OF FACT AND OPINION GOEKE, Ju d g e: Res p on d en td et erm in edi n co m e t ax d efi ci en ci es ag ai n s t Ken t Al an W eg en er (p et i t i o n er) an dh i s wi fe Sh i n ae W eg en er fo r 2 01 1 , 2 0 1 2 , an d 2 0 1 3 (y ears at i s s u e) o f $ 1 7 0 ,9 5 3 , $ 9 8,5 7 3 , an d$ 2 1 ,1 0 8 , res pect i v el y , ad d i t i o n s t o

1 OnSep tem

b er 1 4 , 2 01 8 , res po n d en tm o v edt o d is m i ss Sh i n ae W eg en er as a p et i t i o n er fo r fai l u re t o p ro s ecu t e. W e g ran tedres p o n den t ’ s m o ti o n .- 2
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[* 2 ] t ax fo r fai l u re t o fi l e a t i m el y retu rn u n d er s ect i o n 6 6 51 (a)(1 ) fo r 2 0 1 1 an d 2 0 1 2 o f $ 2 4 ,3 83 an d $ 1 8,9 6 8, res p ect i v el y , an d accu racy -rel at edp en al t i es u n d er
s ect i on 6 6 6 2 (a) fo r 2 01 1 , 2 0 1 2 , an d2 0 13 o f $ 3 4 , 1 91 , $ 19 ,7 1 5 , an d $ 4 , 2 2 2 , res p ect i vel y . 2 Res po nd en td i s al l o wedb u s i n es s ex p en s e d edu ct io n s cl ai m edo n Sch edu l e C, Pro fi to r Lo s s Fro m Bu s i nes s , fo r each y ear at i s s u e o n the b as i s th at th e ex p en s es were n o t o rd i n ary an dn eces s ary b u s i n es s ex p en s es an d, al t ern at i v el y , p et i t i o n er d i dn o ts ub s tan t i at e th e am o u n ts o r p aym en to f t he ex p en s es . Fo l l owi n g co n ces si o ns th e i s s u es rem ai n i n g fo r d eci s i o n are: (1 ) wh et h er p et i t i o n er i s en t i t l edt o the d i sal l o wedb u s i n es s ex p en s e d edu ct i o n s ; we h o l dh e i s
n o t ; an d(2 ) wh et h er p et i t i o n er i s l i ab l e fo r ad d i t i o n s t o t ax fo r fai lu re t o t i m el y fi le fo r 2 0 1 1 an d 2 0 1 2; we h o l dh e i s . 3 FINDINGS OF FACT Wh en p et i t i o n er t i m el y

fi l edthe p et i t i o n , h e res i d edi n Cal i fo rn i a. Th e
reco rdco n s i st s o f a s t i p u l at i o n o f fact s , acco m p an y in g ex h i b i t s , an dtri al

2 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de (Co d e) as am en d edan di n effect atal l rel ev an tt im es , an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. Al l am o u n t s are ro u n dedt o th e n eares td o ll ar.

3 Res p o n d en tco n ced edthe s ec. 6 6 6 2 (a) p en al t i es fo r 2 01 1 , 2 0 1 2, an d2 0 1 3
. Pet i t io n er co n ced edth ath e recei v edan dfai l edt o rep o rt $ 2 3 ,0 2 6 o f can cel l at i o n o f i n d eb t ed n es s i nco m e i n 2 0 1 3
.- 3
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[* 3 ] t es t i m o n y . Pet i t i o n er h as a m as t er o f b u s i nes s ad m i n i s trat i o n d eg ree an dh as
wo rk edi n co rp o rat e fi n an ce fo r o v er t h ree d ecad es . He b eg an h i s career at Gen eral El ect ri c, wh ere h e wo rk edfo r 1 8 y ears an das s i s t edwi th a n u m b er o f i n t ern at i o n al fi n an ce p ro

ject s . Aft er l eav i n g Gen eral El ect ri c h e wo rk edi n
co rp o rat e fi n an ce fo r s ev eral o th er co m p an ies i n cl ud i ng Ot i s Sp u n km ey er (Ot i s), wh ere h e s erv edfo r 1 4 y ears as a v i ce p res i den to f fi n an ce. Du ri n g th e y ears at i s su e h e wo rk edfo r Ot i s, recei v i n g an an n u al s al ary o f o v er $ 2 0 0,0 0 0 , an dl i v edi n Cal i fo rn i a. Pet i t i o ner an d h i s wi fe fi l ed jo i n tretu rn s fo r t h e y ears ati s su e an dcl ai m ed
n etl o s s d edu ct i o n s at tri b u t ab l e t o Sch edu l e C act iv i t i es fo r “ Ken t ’ s Co co a l l c” (Ken t ’ s Co co a). Des p i t e t h e n am e p et i t i on er d i d n oto rg an i ze a l i m i t edl i ab i l i ty
co m p an y . Fo r each y ear at i s s u e p et i t io n er rep o rt edth atKen t ’ s Co co a h adn o g ro s s recei p ts an dcl ai m edb u s i n es s ex p en s e d edu ct i o ns th atare t h e p ri m ary
s ub jecto f t h i s d i s p u t e. Pet i t i o n er fi l edo n e Sch edu l e C fo r each y ear at i s s ue an d rep o rt edh i s p ri n ci p al b u s i n es s act i v i ty was act i n g as a m erch an twh ol es al er o f farm p ro du ct raw m at eri al s . Ho wev er, h e d edu ct edam ou n t s at tri b u t ab le t o two
s ep arat e, u nrel at edact i v i t i es : co co a farm i n g i n th e Rep ub li c o f Gh an a (Gh an a)
an d ai d i n g Afri can refu g ees fro m Gh an ai an refu g ee cam

p s t o i m m i g rat e t o th e- 4
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[* 4 ] Un i tedSt at es i n cl u d i n g t h e p u rp o rt edp hy s i cal tran s fer o f t h e refu gee’ s
m o ney an do th er as s et s t o th e Un i t edSt at es (res cu e s erv i ces ). A. Co co a Farm i n g Pet i t i o ner h ad n o p ri or ex p eri en ce wi th co co a farm i n g. He fi rs tl earn ed ab o utco co a farm i n g th ro u g h h i s em p lo ym en t at Ot i s , wh ere h e was i n v o l v edi n p ro cu rem en t i n cl u d i n g th e p ro cu rem en to f ch o co l at e (p ro du cedfro m co co a b ean s ) fo r Ot i s ’ b ak edg o o d s p ro du ct s . In2 0 0 7 h e b eg an t o co rres p on d o n l i n e wi th i n d i v i du al s fro m

Gh an a ab o u tco co a farm i n g an dth e co co a b ean b u reau cracyi n Gh an a i n cl u di n g th e Gh an a Co co a Bo ard , an ex t en s i o n o f t h e Gh an ai an Go v ern m en t . He u nd ers t oo dth atth e Gh an a Co co a Bo ardo v ers aw t h e p ro ces s o f i n s ect i ci d e t reat m en t s fo r co co a cro p s an d o p erat edd i st ri b u t i o n cen t ers thro u g h wh i ch farm ers s o l dth ei r co co a b ean s . Pet i t i o ner’ s p ri m ary

m ean s o f co n t actwi th th e farm ers was th ro ug h o n l i n e ch at t in g an dem ai l . Ho wev er, h e t rav el edt o Gh an a o n m u l t i p l e o ccas i on s an dm et wi th m em

b ers o f t h e Gh an a Co co a Bo ard , farm ers , an da l awy er. At t i m es h e was
s u s p i ci o u s o f t h e i n d i v i du al s h e was i n co n tactwi th o n l i n e. He p erfo rm eddu e d i l i g en ce i n cl u d i n g v eri fy in g the farm ers ’ i d en t i t ies , th e h i s t o ry o f t h ei r farm i n g act i vi t i es , th e fi n an ci al co n d it i on s o f t h e farm s , o wn ers h i p o f t h e farm s , an dth e
m ark etv al u es o f t h e l an d . He s o ug h tt o en t er i n t o b us i n es s v en tu res wi th farm ers- 5
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[* 5 ] wh o were u n ab l e t o p ay p rev i o u s l y i n cu rredo perat in g ex p en s es an dwag es
an d l ack edfu n d in g t o h arv es tth ei r cu rren t co co a b ean cro p s, b el iev i n g th atwi th b et t er m an ag em en tth e farm s co u l d b eco m e p ro fi t ab l e. Fro m Oct o ber 2 0 0 9 t o Oct ob er 2 0 1 0 p et i t io n er en t eredi n t o atl eas tei g h t wri t ten p art n ers h i p ag reem en t s wi th Gh an ai an farm ers . Each ag reem en twas t o

“ fo rm a l i m i t edp art n ers hi p p urs u an t t o th e p ro v i s io n s o f t he Rep ubl i c o f Gh an a”
an d g o v ern edb y

th e l aws o f Gh an a (p art n ers h ip ag reem en t s ). Had th e Gh an ai an p art n ers hi p s en g ag edi n a t rad e o r b u s i nes s , th ey wo u l d h av e b een fo rei g n p art n ers hi p s u nd er s ect i o n 7 7 0 1 (a)(4 ) an d(5 ) an dwo ul d n oth av e b een req u i redt o fi le U.S. retu rn s o f p artn ers h i p i n co m e. 4 See s ec. 6 0 3 1 (e). Un d er t h e ag reem en t s th e farm ers ag reedt o tran s fer t h ei r as s et s t o th e p art n ers hi p s i n cl u d in g l an d , i m p ro v em en t s , u n h arv es t edcro p s , an di n v en t o ri es o f s al ab l e farm p ro du ct s , an d p et i t i o n er ag reedt o m ak e cap i tal co nt ri bu t i on s t o th e p art n ers hi p s ran g i n g fro m $ 2 ,5 0 0 t o $ 2 5 ,0 00 . Att i m es th e ag reem en t s were ex ecu t ed aft er p et i ti o n er al read y h ad tran s ferred m on ey t o th e farm ers . Pet i t i on er al s o ag reed t o l en dad d i t io n al
m o ney t o th e p art n ers h i p s . Th e ag reem en t s req u i red th e p art ners h i p s t o rep ay th e

4 A fo rei g n p art n ers hi p thati s n o treq u i redt o fi l e a U.S. return i s n o ts ub ject t o the p ro v i s i o n s o f TEFRA. Sec. 6 2 3 1(a)(1 ). W e refer t o t h e farm s as p art n ers hi p s fo r co nv en i en ce an dreach n o co n cl u si o n s reg ard in g wh et h er t h e p art n ers hi p s o r p art ners h i p ag reem en t s were v al i do r wh et her t he p art ners h i p s en g ag edi n a t rad e o r b u s i n es s .- 6
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[* 6 ] l o an s b efo re cal cu l at i n g an dd i s tri b u ti n g p ro fi t s t o p et it i on er an dth e farm ers . Un d er t h e ag reem en t s p et it i o n er recei v ed5 0 % o wn ers h i p i n t eres t s i n th e farm s
an d a ri g h t t o 5 0 % o f t h e farm s ’ fu tu re p ro fi ts . Th e ag reem en t s p ro v i d edth atth e farm ers wo u l dreg i s t er t h e l an d i n b o th p et i t i o n er’ s an dth e farm er’ s n am es . Th e farm ers co n t i n u edt o m an ag e t h e farm s ’ d ay -t o -d ay o perat i o ns an dh ad th e ri gh tt o recei v e s al ari es i f t h e farm p ro fi t s were s u ffi ci en t fo r t h ei r p aym en t . Th e p artn ers h i p s al so en g ag edl o cal b u s i n es s m an ag ers wi th an n u al s al ari es
ran g i n g fro m $ 1 5 , 0 0 0 t o $ 3 6 ,0 0 0 . Th e p art ners h i p ag reem en t s s t at ed thatth e p art n ers hi p s were o b l i g at edt o p ay th e b u si nes s m an ag ers ’ s al ari es ; h o wev er, p et i t i o n er p ai dp o rt io n s o f t h e s al ari es h i m s el f. Un der t h e t erm s o f th e p artn ers h i p ag reem en t s , wi th l i m i t edex cep t i o n , p et i t i o n er h adth e ri gh tt o s el ectth e b u s i n es s
m an ag ers . So m e p art n ers hi p ag reem en t s n am edth e b u s in es s m an ag ers an d s t at ed th ei r s al ari es . Pet i t i o ner’ s p ri m ary

act i v i t y wi th res p ectt o th e farm i n g p o rt i o n o f h i s Sch edu l e C act i v i ty

was tran s ferri n g fu n d s t o th e farm ers fo r th ei r u s e i n cl u d i n g
u s es u nrel at edt o farm in g . Th e farm ers rep res en t edt o p et i t i o n er t h atth ey u s edthe
m o ney fo r t h ei r l i v i n g ex p en s es , tran s p o rt at i o n o f co co a b ean s t o d i s tri b u t i o n
cen t ers , b ri b es t o h av e t h ei r farm s treat edwi th i n s ect ici d e, wh i ch was i n s h o rt
s up p ly , m ed ical ex p en ses o f th e farm ers ’ rel at i v es , an db ai l fo r farm ers wh o were- 7
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[* 7 ] arres t edfo r fai l i n g t o p ay th ei r d eb t s s u ch as b ackwag es o r am o u n t s o wedt o th e Gh an ai an Go v ern m en t . OnSch edu l es C p et i t i o n er d en o t edam o u n t s tran s ferred t o t h e Gh an ai an farm ers as “ m o n i es i n v es t edi n p artn ers h i ps ”: $ 5 4 3 ,0 8 4 , $ 23 3 ,3 9 6 , an d$ 2 4 ,5 1 3 fo r 2 0 1 1 , 2 01 2 , an d2 0 1 3 , res p ect i v el y . Th es e
am ou n t s i n cl ud edthe am o u n t s th atp et i ti o n er treat ed as l o an s an dex p ect ed rep aym en to f. He al s o d edu ct edex pen s es thath e p ers o n al ly i n cu rred s uch as
o ffi ce s up p l ies , b an k i n g an d m o n ey tran s fer fees , an dcar ex pen ses . Th e p art n ers h i p ag reem en t s p ro v i dedth atth e b us i n es s m an ag ers were p ri m ari l y res p on s i b le fo r m ai n tai n i n g th e b oo k s an d reco rd s o f t h e farm s . Ho wev er, th e b u s i n es s m an ag ers o ft en d i dn o tk eep reco rd s . Nei th er th e farm ers
n o r t h e m an ag ers p ro v i d edd o cu m en t at i o n t o p et i t i o n er. Att i m es , th e farm ers p ro v id edwri t t en s u m

m ari es vi a em ai l o f t h ei r act i v it i es an d ex p en s es . B. Res cu e Serv i ces Pet i t i o ner al s o d edu ct edb u s i n es s ex p en s es rel at edt o h i s p urp o rt ed res cu e
s erv i ces o n Sch edu les C fo r “ m o n i es s p en tt o en t er n ew l i n e o f b us i n es s ” o f $ 2 8 ,0 6 5 an d$ 3 ,9 5 0 fo r 2 01 1 an d2 0 1 2 , res p ect i v el y . Th e Gh an ai an Go v ern m en t
an d th e Un i t edNat i o n s Hi g h Co m m i s s i on fo r Refu g ees (UNHCR) es t ab l i sh ed refu gee cam

p s i n Gh an a fo r p ers o n s fl eei ng co n fl ictan dp o li t ical tu rm o i l i n
n ei g h b o ri n g wes t Afri can co u n tri es . Pers o n s rep res en ti n g th em sel v es as d i p l o m at s- 8
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[* 8 ] o r o ffi ci al s wo rk i n g wi th th e UNHCR co n t act edp et i t i o ner o n l i n e an das k ed h i m t o h el p fam i l ies fro m

the refu g ee cam

p s i m m i g rat e t o the Un i t ed St at es . Pet i t io n er’ s p ri n ci p al m ean s o f co n tactwi th th es e i n di v i du al s was o n l i n e. He b el i ev edth atth e refu g ees were fo rm er m em b ers o f an o vert h ro wng o v ern m en to r
ex ecu t i v es o f a l arg e d i am o ndco m p an y . As p arto f t h e res cu e s erv i ces , th e co n t act s rep res en t edt o p et i t io n er t h atthe refu gee fam i l i es h ad s ub s tan t i al weal th an dn eed edas s i s t an ce wi th p h y s i cal l y tran s ferri n g t h ei r weal th t o th e Un i t edSt at es . Th e co n t act s fu rt h er rep res en t edth at p et i t i o n er wo u ldrecei ve a s ubs t an t i al p o rt i o n o f t he fam i l i es ’ weal th upo n th ei r i m m i g rat i o n t o t h e Un it edSt at es as co m p en s at i o n fo r h is as s i s t an ce. Pet i ti o n er tran s ferred h i s o wnm o n ey t o h i s co n t act s fo r t h e p u rp o rt ed p u rp o s e o f p ay i n g th e
ex p en s es i n cu rredt o p h y s i cal l y tran s fer t h e refu gees ’ m o n ey t o th e Un i t edSt at es th ro u g h th e d el i veryan dco n si g n m en to f m et al tru n k s co n t ai n i n g cas h an d/ o r o t her
as s et s. He recei v edco rres p o n d en ce wi th l et t erh ead s fro m th e U.S. Cu s t o m s an d Bo rd er Pro t ect i o n Serv i ces , th e Un i t edNat i o n s Gen eral As s em b l y , th e U.S. Dep art m en to f Ho m el an dSecu ri t y , v ari o us m i n i s tri es wi th i n the Gh an ai an Go v ern m en t , an dai rp o rts ecu ri ty o r s t o rag e faci l i t i es i n Cal i fo rn ia, am o n g o th ers . He recei v edcert i fi cat es l ab el edas fro m th e W o rl dBan k , th e In t ern at i o n al M o n et ary Fu nd , an dth e Sup rem e Co u rto f Fl o ri d a, am o n g o th ers . Pet i t i o ner n ev er- 9
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[* 9 ] h el p edan y o n e s u cces s fu l ly i m m i g rat e t o th e Un i t edSt at es an dd i dn o trecei v e
an y p aym en t fo r h i s s erv i ces o r rep aym en to f t h e am o u n t s h e h adad v an ced . Ov er th e co u rs e o f atl eas to n e y ear h e recei v edem ai l s i d en t i fy i n g a s eri es o f n ew
o b s t acl es t o the d el i v ery

o f t h e refu g ees ’ m o n ey

an ds eek i n g ad d i t i o n al fu n d s al l eg ed l y n eed edt o o v erco m e th es e o b s tacl es t o th e d el i v ery . Ev en tual l y , p et i t i o n er t o l dh is co n t act s t h ath e d idn o th av e an y fu nd s l eftt o ad v an ce. Pet i t i o ner b eg antran s ferri n g fu n d s t o Gh an a aro u nd2 0 1 0; h e t ran s ferred $ 1 8 7 ,0 0 0 i n 2 0 1 0
. He u s edh i s s al ary (o v er $ 2 0 0 , 0 0 0 an n u al l y ) an dd is tri b u t i o n s fro m h i s i n d i v i du al ret i rem en tacco un t (IRA) fo r t h e ad van ces . He rep o rt ed $ 4 9 0 ,4 6 3 i n t ax ab l e IRA d i st ri b u t i on s , $ 4 7 , 0 44 i n t ax ab l e p en s i o n an dan n u i ty d i s tri b u t i o n s , an d $ 4 4 ,5 7 6 i n n on t ax ab l e p en s io n an dan n ui ty d i s tri b u ti on s o n h i s t ax return s fo r t h e y ears ati ss u e. He m ad e wi re tran s fers an di n cu rred wi re tran s fer fees fo r t h e y ears ati s s u e as fo l l o ws : $ 5 2 4 , 0 0 0 i n wi re tran s fers an d $ 1 0 ,5 0 0 i n fees fo r 2 01 1 , $ 1 4 5 ,0 0 0 i n wi re t ran s fers an d$ 3 , 6 00 i n fees fo r 2 0 1 2 , an d $ 2 1 ,0 0 0 i n wi re t ran s fers an d$ 1 ,0 0 0 i n fees fo r 2 0 1 3
. C. Sch edu l e C Ex p en s es Pet i t i o ner cl ai m edb u s i n es s ex p en s e d edu ct i o ns o n h i s Sch edu l es C, wh i ch
res p o n d en t d i s al l owedi n th ei r en t i ret y , as fo ll o ws :- 1 0 -

[* 10 ] Ex p en s e 2 0 1 1 2 01 2 2 0 1 3 Car an dtru ck --- $ 1 1 0 $ 3 3 3 Co n tract l ab o r $ 3 3,2 7 6 2 ,0 0 0 --- Dep reci at i o n --- 3 0 --- No n m o rt g ag e i n t eres t 5 ,0 0 0 1 5 ,0 0 0 1 ,0 0 0 Leg al an dp ro fes s i o n al s erv ices 2 5 ,0 0 0 2 7 ,9 0 0 4 ,4 6 0 Offi ce 1 ,0 0 0 5 0 0 2 0 0 Ren to r l eas e o f o th er b u s i n es s p ro p erty 1 9 ,0 0 0 1 9 ,0 0 0 3 ,2 0 0 Sup p li es 3 8 5
--- --- Trav el 5 ,5 0 0 6 ,0 0 0 8 9 0 Ut i l i t i es 5 ,0 0 0 1 9 ,0 0 0 1 3 ,0 0 0 Ban k in g fees 2 ,0 0 0 4 5 0 2 5 0 M on ey tran s fer fees 1 1 ,5 0 0 8 ,4 4 0 1 ,4 2 2 M on ey i n ves tedi n p art ners h i p s 5 4 3 ,0 8 4 2 3 3,3 9 6 2 4 ,5 1 3 M on ey s p en t t o en t er n ew l i n e o f b u s i n es s 2 8 ,0 6 5 3 ,9 5 0 --- To t al 6 7 8 ,8 1 0 3 3 5,7 7 6 4 9 ,2 6 8 Res p o n d en td i s al l o wedth e cl ai m edb us i n es s ex p en se d edu ct i on s o n th e b as i s thatth ey

were n o tfo r o rd i n ary

an dn eces s ary

b u s i n es s ex p en s es an d al t ern at i v el y

th atp et i t io n er d i dn o ts ubs t an ti at e t h e am o u n t s o r p aym en t o f t h e- 1 1 -

[* 1 1 ] ex pen ses . 5 Pet i t i o n er an dh i s wi fe fi ledth ei r 2 0 1 1 an d2 0 1 2 jo in tt ax retu rn s l at e o n J an uary2 6 , 2 0 1 5 , an dDecem b er 9 , 2 01 4 , res p ect i v el y . Pet i t i on er p rep ared th e ret urn s . He o ffered n o ex p l an at i o n fo r t h ei r l at e fi li n g . OPINION Dedu ct i o n s are a m at t er o f l eg i s l at i v e g race, an dthe t ax p ay er b ears th e b u rd eno f p ro vi ng h e i s en t it l edt o cl ai m edd edu ct i o n s . Ru l e 1 4 2 (a); INDOPCO, In c. v . Co m

m is s io n er, 5 0 3 U.S. 7 9 , 8 4 (1 99 2 ). Gen eral l y , th e Co m m i s s io ner’ s d et erm i n at i o n s i n a n o t i ce o f d efi ci en cy are p res u m edco rrect , an dth e t ax p ay er h as th e b u rd en o f p ro v i n g t h e d et erm i n at i o n s are i n erro r. W el ch v . Hel veri ng , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3 ). To th at en d , a t ax p ay er m u s t m ai n t ai n reco rd s s u ffi ci en tt o al l o w th e Co m

m i s s io n er t o d et erm i n e h i s co rrect t ax l i ab il it y . Sec. 6 0 0 1 ; s ec. 1 .6 00 1 -1 (a), In co m e Tax Reg s . A t ax p ay er al s o b ears th e b u rd en t o s ub st an t i at e th e am o un tan d p u rp o se o f an ex p en s e u n d erl y i n g an y cl ai m edd edu ct i o n . Hi g b ee
v . Co m m i s s i o n er, 1 1 6 T.C. 4 38 , 4 4 0 (2 0 0 1).

5 W e d o n o t ad dres s th e i ss u e o f s ubs t an ti at i o n . W e fu rt h er n o t e t h ati twas p et i t i o n er t h atal l eg ed ly

p ai d t h e am o u n t s th ath e d edu ct edi n co n n ect io n wi th th e farm i n g act i v i ty , n o tth e Gh an ai an p art n ers h i p s . Si gn i fi can tp o rt i o n s o f t h e d educt edam o u n t s were t h e am o u nt s h e t ran s ferred as l o an s an d b an k i n g an dwi re tran s fer fees
. Pet it i o n er as s ert edthatth e am o u n ts h e t ran s ferred t o th e farm ers were l o an s th ath e h o p edwo u l db e rep ai d
.- 1 2 -

[* 1 2 ] I. Sch edu l e C Dedu ct i o n s A t ax p ay er i s en t i t l edt o d edu ctal l o rd i n ary an dn eces s ary

ex p en s es p ai do r i n cu rreddu ri n g th e t ax ab l e y ear i n carry i n g o n a t rad e o r b u s in es s o r fo r t h e p ro duct i o n o r co l l ect i o n o f i n co m e. Secs . 1 6 2 (a), 2 12 (1 ). Ord i n ary ex p en s es are
o n es th atari s e b y

v i rtu e o f co m

m o n o r freq uen to ccu rren ces i n the t ax p ay er’ s b u s i n es s , an dn eces s ary

ex pen s es are o n es th atare ap p ro p ri at e an dh el p fu l fo r t h e d ev el o p m en to f t h e b u si n es s . Co m m i s si o n er v . Tel li er, 3 8 3 U.S. 6 8 7 , 6 8 9 (1 9 9 6 ); Dep ut y v . du Po n t , 3 0 8 U.S. 4 8 8 , 4 9 5 (1 9 4 0 ). Th i s cas e p res en t s a t h res h o l dqu es t i o n fo r t h e Sch edu l e C b u s i n es s ex p en s e d educt i o n s : wh et h er p et i t i on er was en g ag edi n a t rad e o r b u s in es s o r anact i v i t y fo r t h e p ro du ct i on o f i nco m e wi th res pect t o h i s i n v o lv em en ti n th e Gh an ai an farm s o r t h e res cu e s erv ices th atco u l dg i v e ri s e t o d edu ct i b l e ex p en s es u n d er
s ect i on 1 6 2 o r 2 1 2(1 ). 6 Res p o nd en t arg ues th atp et i t i o n er was n o ten g ag edi n a trad e o r b u si n es s o r an act i vi ty fo r t he p ro du ct io n o f i n co m e. W e fi n dth at p et i t i o n er d i dn o ten gag e i n a t rad e o r b u si nes s o r an act i v i ty fo r t h e p ro duct i o n o f i n co m e.

6 Nei th er p art y

as s ert s th atth e ex p en s es are ex p en s es o f t h e fo rei g n p art n ers hi p s . Thu s , we fo cu s o n wh et h er p et i t i o n er i n h i s cap aci ty as an i n d i v i du al t ax p ay er m ay

d edu ctan y

o f t h e ex p en s es i n d i s p u te.- 1 3 -

[* 1 3 ] A. Trad e o r Bu s i n es s Th e Co d e p ro v i d es n o d efi n i t i o n fo r a trad e o r b us i n es s . Th e Sup rem e Co u rth as s t at ed : “ [T] o b e en g ag ed i n a t rad e o r b u s in es s , the t ax p ay er m u s tb e i n v o l v ed i n th e act i v i ty

wi th co n t i n u i ty

an d reg u l ari ty

an d* * * th e t ax p ay er’ s p ri m ary p u rp o s e fo r en g ag i n g i n the act i v i ty m u s tb e fo r i n co m e o r p ro fi t .” Co m m i s s i o n er v . Gro et zi n g er, 4 8 0 U.S. 2 3 , 3 5 (1 9 8 7 ). Th e qu es t i o n o f wh et h er a t ax p ay er i s en g ag edi n a t rad e o r b u s in es s i s i n h eren t ly fact u al an d“ fact s v ary ”. Id . at3 6 . Fo r t h e Co u rtt o an s wer t h atqu es ti o n i n th e affi rm at i v e th e t ax pay er
m u sts at i sfy

th ree req u i rem en t s: (1 ) h e u n d ert o o kth e act i v i ty i n t en d i n g t o earn p ro fi t; (2 ) h e i s reg u l arl y

an dact i v el y

i n vo l v edi n th e act i v i ty ; an d(3 ) t h e act i v i t y h as actu al l y

co m m en ced . J afarp o u r v . Co m m i s s io n er, T.C. M em o . 2 0 1 2 -1 6 5 , s l i p
o p . at1 4 . Fai l in g t o m eetan y o n e o f t h es e t h ree p ro n g s i s d i sp o si t iv e an dm ean s th atth e t ax p ay er was n o t en g ag edi n a t rad e o r b u s i n es s . Id ., s l i p o p . at1 5
. Fo r reg u l ar an dact i v e i n v o l vem en tt o g i v e ri s e t o a t rad e o r b u s in es s , th e t ax p ay er m

u s t s ho w ex t en s i v e b u s i n es s act i v i ty o v er a s ub s t an t ial p eri o d . Id
. Sp o rad i c act iv it i es , h ob b i es , an dam u s em en td i v ers i o n s are n o ten o u g h t o es t ab l i s h a t rad e o r b u s i nes s. Co m m i s si o n er v . Gro et zi ng er, 4 8 0 U.S. at3 5
. Wh en d et erm i n i n g wh eth er a t ax p ay er’ s i n v o l vem en ti s reg u l ar an d act i v e, we co n s i d er wh et h er h e d ev o t edt i m e t o an o th er jo b . J afarp o u r v . Co m m i s s io n er, s l i p o p . at1 5
.- 1 4 -

[* 1 4 ] Th e t ax p ay er’ s m an ag em en to f h i s o wn i n v es t m en t s i s g en eral l y n o t a t rad e
o r b u si n es s . Wh i p p l e v . Co m m i s s io n er, 3 7 3 U.S. 1 93 , 2 0 0 (1 9 6 3 ); Hat ch er v . Co m m i s s i o n er, T.C. M em o . 2 0 1 6 -1 8 8 , at* 1 2 , aff’ d , 7 2 6 F. Ap p’ x 2 0 7 (5 th Ci r. 2 0 1 8 ). 1
. Co co a Farm i n g Pet i t i o ner h as n otes t ab l is h edth ath e was s u ffi ci en t l y reg u l arl y an dact i v el y i n v o l v ed i n co co a farm s ’ o perat i o n s fo r i tt o co n s t i tu t e a t rad e o r b u s i n es s, an di t
s eem s i m p ro b ab l e t h ath e co ul d h av e b een , g i v en th e fact th atth e farm s were
acro s s th e wo rl dan d h e wo rk edfu l l t i m e as a v i ce p res i d en t at Ot i s . Rat h er, h e
m ad e fi n an ci al i n ves tm en t s i n th e farm s t o acq u i re h al f o f t h e farm ers ’ as s et s an d l en tm o n ey

t o t h e farm ers . Un d er t he p art ners h i p ag reem en t s , h e recei v ed5 0 %
o wn ers hi p o f th e l an dan do th er as s et s an dth e ri g h tt o 5 0 % o f fu tu re p ro fi ts . He i n v es t edi n farm s th atwere u nab l e t o p ay thei r ex p en s es an dd idn o t h av e
s u ffi ci en tfu n d in g t o h arv es tth ei r cu rren t cro p s . He b el i ev edth atwi th b et t er
m an ag em en tth e farm s co ul db e p ro fi t ab l e. Th e farm ers co n t i n u edt o m an ag e t h e d ay -t o -d ay

o p erat i o n s , b u tth e farm s al so en g ag eda b u s i n es s m an ag er o ft en ch o sen b y

p et i ti on er. Pet i t i o n er’ s l i m i t edi n vo l v em en ti n th e farm s , p ri m ari l y wi ri ng m o ney t o i n di v i du al s i n Gh an a, d o es n o t ri s e t o th e l ev el o f t h e reg u l ar an d- 1 5 -

[* 1 5 ] act i v e i n v o l v em en treq u iredt o es t ab l is h a t rad e o r b u s i n es s an dd edu ct i b l e b u s i n es s ex p en s es u n d er s ect i o n 1 6 2
. Ev en i f p et i t i o n er co u l d es t ab l is h thath i s act i v i t i es co n s t i tu t ed a t rad e o r b u s i n es s , h e h as an o th er p ro b l em . He s t at edth at th e b u l ko f h i s d edu ct ed
ex p en s es were i n fact l o an s th ath e ex p ect ed t o b e rep ai d. Tran s fers m ad e wi th th e
ex p ect at i o n o f rep aym en tare l o an s , an dwe h av e rep eat ed l y h el dth atthey

are n o t d educt i b l e b u s i n es s ex p en s es . See Herri ck v . Co m m i s s io n er, 6 3 T.C. 5 6 2, 5 6 7 (1 9 7 5); Can el o v . Co m

m i ss i o n er, 5 3 T.C. 2 1 7 , 2 2 4 (1 9 6 9 ), aff’ dp er cu ri am , 4 4 7 F.2 d4 8 4 , 4 8 5 (9 th Ci r. 1 9 7 1 ). Th i s i s t ru e ev en wh ere t h e p ro s p ecto f rep aym en t i s d o ub t fu l . M erri t tv . Co m m i s s i o ner, T.C. M em o . 2 0 0 3-1 8 7, s li p o p . at9
. Th erefo re, ev en i f p et i t i o n er h ades t ab l i s h eda t rad e o r b u s i n es s, h e wo u ldn o tb e
en t i t l edt o d edu ctth e l oan s u n d er s ect i o n 1 62
. Fi n al l y , p et i t i o n er d i dn o tp res en tan y d o cu m en t at i o n o f t h e farm s’
ex p en s es . He t es t i fi edthatth e farm ers u s edth e l o an s fo r t h ei r l i v i n g ex p en s es , m ed i cal ex p en s es , i ns ect i ci d e treat m en t s , tran s p o rt at i o n co s t s , b ai l , an db ri b es . 7 Ho wev er, h e d i dn o trecei ve an y recei p ts o r o th er d o cu m en t at i o n fro m th e farm ers

7 Th e farm ers p urp o rt ed l y p ai db ri b es t o o b t ai n p ri o ri ty fo r i n s ect i ci de treat m en tb ecau s e t h ere was n o ten o u gh i n s ect i ci d e t o s prayal l farm s . Th es e s o rt s o f i l l i ci tp aym en t s m ay

b e co m m o np l ace i n o th er p art s o f t he wo rl dan da n eces s ary co s to f d oi n g b u s i n es s , b u tth e Co d e p ro h i b i t s th ei r d educt i o n. Sec. 1 6 2 (c)(1 ).- 1 6 -

[* 1 6 ] o r b u s i nes s m an ag ers . W e d o n o t co ns i d er h o w th e farm ers u s edth e l o an s . W e are n o trev i ewi ng th e t ax y ears o f t h e fo rei g n p art ners h i p s ; we are red et erm i n i n g p et i t i o n er’ s t ax l i ab i l i t i es as rep o rt edo n h i s return s an dth e
ex p en s es d edu ct edo n Sch edu l es C.

2
. Res cu e Serv i ces Pet i t i o ner h as n ots h o wnth ath e h adreg u l ar an d act i v e i n v o l v em en twi th h i s
res cu e s erv i ces an d , th erefo re, h as n o tes t ab li s hedth atth ey co ns t i tu t e a t rad e o r b u s i n es s . Hi s res cu e s erv i ce act i v i t i es co n s is t eds o l el y o f wi ri n g m o ney t o i n d i v i du al s i n v o l v edi n th e refu g ee s ch em e i n ex ch an ge fo r a l arg er s u m o f m o n ey t o b e p ai dt o h i m

l at er; n o m o ney

ev er arri v ed . On e i n d iv idu al i n v o lv edi n th e
s ch em e t o wh o m

p et it i o n er h adtran s ferred o v er $ 1 4 0,0 0 0 t es t i fi edat tri al v i a t el ep ho n e. Pet i t i o n er rep res en t edth atth e wi tn es s was o u to f th e co un try an d
n eed edt o p art i ci p at e b y

p h o n e. Ho wev er, du ri n g th e t ri al we l earn edth atth e wi tn es s was i n Cal ifo rn i a b u th e refu s edt o g i v e h is ex actl o cat io n t o th e Co u rt . W e fi n dth e wi tnes s’ t es ti m o n y ev as i v e, un rel i ab le, an dl ack i n g an y cred i b i l i ty . Pet i t io n er h as n ots h o wnan y reg u l ar an d act i v e i n v o lv em en ti n th e res cu e s erv i ce act i vi t i es . He s en ts u m s o f m o n ey t o u n kn o wn p ers o ns h o p i n g fo r a wi n d fal l at
s o m e p o i n ti n th e fu tu re. He ap p ears t o b e th e v ict i m o f a s cam . W e s ym

p at h i ze- 1 7 -

[* 1 7 ] fo r h is s i tu at i o n , b u ts u ch act i v i ty i s n ota t rad e o r b u s i n es s t h at g i v es ri s e t o d educt i b l e ex p en s es . B. Pro du ct i o n o f In co m e As an al t ern at iv e p os i t i o n , p et i t i o n er arg u es th ath i s ex p en s es i n t h e farm i n g
an d res cu e s erv i ces act i v it i es are d edu ct ib l e u n d er s ect i o n 2 1 2 (1 ) as o rd i n ary an d
n eces s ary ex p en ses i ncu rredo r p ai dfo r th e p ro du ct i o n o r co l l ect i o n o f i n co m e. To d edu ctex p en s es u nd er s ect i o n 2 1 2 (1 ) p et i t i o n er m u s tes t ab l i s h th ath e en g ag ed i n the act i v i ty

wi th th e “ p red o m i n an t , p ri m ary o r p ri n ci p al o bject i v e” t o real i ze a p ro fi t. No v akv . Co m

m i s s i o n er, T.C. M em o . 2 00 0 -2 34 , s li p o p . at1 0 ; s ee W o l f v
. Co m m i s s i o n er, 4 F.3 d7 09 , 7 1 3 (9 th Ci r. 1 9 93 ), aff’ g T.C. M em o . 1 9 9 1 -2 1 2 ; Al l en
v . Co m m i s s i o n er, 7 2 T.C. 2 8 , 3 3 (1 9 7 9 ) (h o l d i n g thata t ax p ay er m u s ten g ag e i n
an act i v i ty

p red o m i n an t ly

t o m ak e a p ro fi t ); s ee al s o s ec. 1 8 3 (a), (c) (d i s al l o wi n g d educt i o n o f ex pen s es at tri b u t ab l e t o act i v i t i es n o t en g ag edi n fo r p ro fi t , d efi n ed
as ex p en s es o th er th an th o s e d edu ct i b le u n d er s ect i o n 1 6 2 o r 2 1 2 ). Fact ors we co n s i d er i n d et erm i n in g wh et h er a t ax pay er h adth e req u i s i t e p ri m ary p ro fi t i n t en t i n cl u d e: (1 ) t h e m an n er i n wh ich th e t ax p ay er carri edo n th e act i vi ty , (2 ) h i s ex p ert i s e, (3 ) t h e t i m e an deffo rtth at h e ex p en dedi n carry i n g o n th e act i v i ty , (4 ) t h e ex p ect at i o n th atas s et s u s edi n th e act i v i ty m ay ap p reci at e i n
v al u e, (5 ) t h e t ax p ay er’ s s u cces s i n carry i n g o n o th er s i m i l ar o r d i ss i m i l ar- 1 8 -

[* 1 8 ] act i v i t i es , (6 ) t h e act i v i ty ’ s h i s t o ry o f i n co m e o r l o s s, (7 ) t h e am o u n to f p ro fi t, i f an y , (8 ) t h e t ax p ay er’ s fi n an ci al s tatu s , an d(9 ) an y el em en t s o f p ers o n al p l eas u re o r recreat i o n i n v o lv ed . Sec. 1 .1 8 3-2 (b ), In co m e Tax Reg s . No s i n g l e fact or i s co n cl u s i v e, an dwe m ay acco rd cert ai n fact o rs g reat er wei gh tth an o th ers . Go l an ty v . Co m m i s s i o n er, 7 2 T.C. 4 1 1 , 4 2 6 (1 9 7 9), aff’ d wi th o u tp ub l i s h ed
o p i n i o n , 6 4 7 F.2 d1 7 0 (9 th Ci r. 1 9 8 1 ); Al l en v . Co m m i s s i on er, 7 2 T.C. at3 4
. Each o f t h es e fact o rs wei g h s ag ai n s tp et i t i o n er wi th res p ectt o b o th th e farm i n g an dth e res cu e s erv i ces . He en g ag edi n th e act i v i t i es p ri m ari l y th ro u g h
em ai l an do n l i ne ch ats erv i ces . He h adn o ex p ert i s e i n co co a farm i n g , h el p i n g p ers o n s i m

m i g rat e, o r t ran s p o rt i n g l arg e s u m s o f m o n ey i n t o the Un i t ed St at es . Hi s fu l l -t i m e jo b l i m i t edh i s ab i l i ty t o b e reg ul arl y

an d act iv el y

i n v o lv edi n ei th er act i vi ty . Th e act i v i t i es were s tru ctu reds o th ath e wo u l dh av e t o i n ves tm i n i m al t i m e an deffo rt . Hi s co n tri b u t i o n was al m os tex cl u si vel y fi n an ci al . He h adn o
ex p ect at i o n t h atth e farm ’ s real es t at e wo ul dap p reci at e i n v al u e. He h ad n o
s u cces s atth es e o r an y

s i m il ar act i v i t i es ; h e h adn o i n co m e fo r t h e y ears ati s s u e fro m th es e act i v i t ies an dn o p ro fi t . Pet i t i o n er h ada s ub s t an t i al IRA an d earn edan
an n ual s al ary

o f o v er $ 2 0 0 , 0 0 0 . Itap p ears h i s fi n an ces s uffered as a res ul to f h i s act i vi t i es ; h e rep o rt edo v er $ 50 0 ,0 0 0 i n IRA an d p en s i o n d is tri b ut i o n s fo r t h e y ears ati s s u e. Fi n al l y , th e reco rds u g ges t s a p ers o n al rel at i o n s h i p wi th s o m e- 1 9 -

[* 1 9 ] Gh an ai an farm ers , i n di cat i n g el em en t s o f p ers o nal p l eas u re o r recreat i o n . W e fi n dth atp et i t i o n er d i dn o ten g ag e i n h i s co co a farm i n g o r res cu e s erv i ce act i vi t i es wi th th e p ri m ary p u rp o s e an di n ten to f m ak i n g a p ro fi t . C. Co n cl u si o n Pet i t i o ner was n o treg u l arl y an dact iv el y

i n v o lv edi n h i s co co a farm i n g o r
res cu e s erv i ces act i v i ty . No r d i dh e en g ag e i n t h es e act i vi t i es wi th th e p ri m ary p u rp os e an di n t en to f m ak i ng a p ro fi t . Hi s act i v i t i es d idn o t g i v e ri s e t o a t rad e o r b u s i n es s fo r t h e d edu ct i o n o f ex p en s es u n d er s ect i o n 1 6 2 . Hi s al t ern at i v e p o s i t i o n
o f d educt i b i l i ty

u n d er s ect i on 2 1 2 fo r t he p ro du ct i o n o r co l lect i o n o f i n co m e i s al s o wi th o u tm eri t. Acco rd i n g l y , we s u s t ai n res p on d en t ’ s d et erm i n at i o n t o d i s al lo w th e cl ai m ed Sch edu le C ex p en s e d edu ct io n s . II. Sect io n 6 6 5 1 (a)(1 ) Ad d i t i o n s t o Tax fo r Fai l u re t o Ti m el y Fi l e Sect io n 6 6 5 1 (a)(1 ) i m

p o s es an ad d i t io n t o t ax fo r fai li n g t o fi l e a t i m el y t ax retu rn . Res p on d en td et erm i n edth atp et i t i o ner i s l i ab le fo r ad d it i on s t o t ax fo r fai l i n g t o t i m el y

fi l e h i s 2 01 1 an d2 0 1 2 retu rn s . Res p o n d en th as th e b u rd en o f p ro duct i o n an dm

us tp res en ts u ffi ci en tev i d en ce t o s h o w the ad d i t i o n t o t ax i s ap p ro p ri at e. Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 46 . A t ax p ay er can av o i dth e ad d it i o n t o t ax i f h e can s ho w th e fai l u re t o t i m el y fi l e was du e t o reas o n ab l e cau s e
an d n o twi ll fu l n eg l ect . Sec. 6 6 5 1 (a)(1 ). Th e t ax p ay er, h o wev er, ret ai n s th e- 2 0 -

[* 2 0 ] b u rd en o f p ro v in g thath e h ad reas o nab l e cau s e. Hi gb ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 46 -4 4 7 . Th e p art i es h av e s t i p u l at edth atp et i t i o n er fi l edh i s jo i n t retu rn s fo r 2 0 11 an d 2 0 1 2 l at e o n J anuary2 6 , 2 0 1 5 , an d Decem ber 9 , 2 01 4 , res p ect i vel y . Acco rd i ng l y , res p o n d en th as m et h i s b u rd en o f p ro du ct i o n . Pet i t io n er p res en t edn o ev i d en ce t o s h o w reas o n ab l e cau se fo r h is l at e fi l in g s . Th erefo re, res po n d en t ’ s d et erm i n at i o n s are s u s t ai n ed
. In reach i n g o u r h o ld in g , we h av e co ns i d ered al l arg u m en t s m ad e, an d , t o th e
ex t en tn o tm en t i o n edab o v e, we co n cl u de t h ey are m o o t , i rrel ev an t , o r wi th o u t
m eri t . Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.