T.C. M em o . 2 0 1 9 -6 9

UNITED STATES TAX COURT

M IKEL A. BROW

N, SR., AND DEBRA A. BROW N, Pet i t io n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 6 0 90 -1 3
. Fi l edJ u n e 1 0 , 2 0 1 9
. M i k el A. Bro wn , Sr., an dDeb ra A. Bro wn , p ro s es e. M ari a Ceri n a De Ram o s , fo r res p o n d en t
.

M EM ORANDUM FINDINGS OF FACT AND OPINION
HOLM ES, J u d g e: W e can t ak e ju d i ci al n o t i ce, b ecau s e t h ere can b e n o d i s p u t e, t h atwes t ern New Yo rkh as m ad e o u t s t an d i n g co n t ri b u t i o n s t o Am eri can- 2
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[* 2 ] cu i s i n e: s cru m

p t io us b eef o n weck , 1 d el i ci o u s Bu ffal o -s t y l e p i zza, 2 s weet
s p o n ge can d y , 3 an dth e i nco m p arab l e s p ag h et t i p arm . 4 Bu tth i s cas e waft edt o o u r Co u rtfro m

th e p erfu m edaro m a o f t h e d eep fry ers o f a res t au ran ti n Al am o g o rd o , New M ex i co . Th e co up l e i n ch arg e o f t h o s e fry ers was Cyn t h i a an d Bri an Harri s . Th ey
are n at i v es o f Bu ffal o an dm i s s i o n ari es t o th e So u t h wes to f t he Ni ck el Ci t y ’ s m o s t fam o u s l o cal fo o d --t h e Bu ffal o wi n g . In2 0 0 8 th ey o p en edth ei r res t au ran tn am ed A Tas t e o f Bu ffal o wi t h the h el p o f an o t h er co up l e, M i k el an d Deb ra Bro wn . Th e l o cal p o p u l at i o n , h o wev er, s eem edt o p refer fo o dcal l ed“ Tex -M ex ” an d

1 A t as ty ro as t -b eef s an d wi ch o n a s p eci al ro l l . See LarryOl m s t ed , Bu ffal o , N.Y.’ s Fam o u s Beef o n W eck San d wi ch , USA To d ay (Oct . 5 , 2 01 7 ), h t tp s : // www.u sat o d ay . co m / s t o ry / t rav el / co l u m

n i s t/ g reat am eri can bi t es / 2 0 1 7 / 1 0 / 0 5 / b eef-weck -s an d wi ch -b u ffal o -n ew-y o rk/ 7 3 1 4 20 0 0 1 /
.

2 No tt o o th i n , an d n o tt o o th i ck . See Art h u r Bo v i n o , Is Am eri ca’ s Pi zza Cap it al Bu ffal o, New Yo rk ? , Th e Dai l y Beas t(Au g . 1 3 , 2 0 1 8), h t tp s : // www.th ed ai l y

b eas t .co m

/ i s -am eri cas -p i zza-cap it al -b uffal o -n ew-y o rk
. 3 Li g h t -as -ai r ch o co l at e o n th e o u t s i d e wi t h a cri s p y , cru nch y “ s p o n g e” o f d el i cat e caram el i zeds u g ar o n t h e i n s i d e. See Aaro n Bes eck er, Bu ffal o ’ s Day t o Cel eb rat e Sp on g e Can d y , Gu s t o (No v . 1 7 , 2 01 6 ), h t tp s : //b u ffal o news .co m

/ 2 0 16 / 0 9 / 21 /b uffal o s -d ay -cel eb rat e-s p o ng e-can d y /
. 4 A b o wl o f s p ag h et t i co v ered i n m el t ed m o zzarel l a ch ees e an dacco m p an i ed b y a s i d e o f m ari n ara s au ce. To p p edo ff wi t h g rat edch ees e b y req u es t
. (No ci t at i o n n eces s ary .)- 3
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[* 3 ] s o m et h i n g cal l ed“ Bar-B-Q”. Th e Harri s es ’ wi n g s fel l o n ro cky g ro u n d ; th e
res t au ran tcl os ed
. Th e Co m m is s i o n er s ay s th atth e Bro wn s d i d n o t m at eri al ly p art i ci p at e i n th e
res t au ran t ’ s b u s i n es s an ds o are n o ten ti t l edt o d edu ctth ei r s h are o f t h e
res t au ran t ’ s l o ss es an d o t h er ex p en s es . Hi s au d i tal s o d i s co v ered wh ath e cl ai m s i s
a s i g n i fi can tam o u n t o f u n rep o rt edi n co m e. FINDINGS OF FACT A. Ch ri st i an J oy

Cen t er A m ajo r p arto f t he Bro wn s ’ t ax t ro ub l es s t em s fro m th e b read t h o f t h ei r
wo rk : A Tas t e o f Bu ffal o was n o tthei r m ajo r act i v i t y i n t h e t ax y ears ati s s u e h ere--2 00 7 -0 9 . Th ei r fo cu s was o n Ch ri s t i an m i n is try , an d Rev eren dM i k el Bro wn i s t he fo un d er an dl on g t i m e p as t o r o f an i nd ep en d en t ch u rch n am edth e Ch ri s t i an J o y Cen t er (CJ C); h i s wi fe Deb ra i s i t s ad m i n i s trat o r. Rev eren d Bro wn i s wel l

cred en t i al ed , wi t h a d o ct o rat e i n b i b l i cal s tu d i es an da d eg ree i n s o ci al p s y ch o l o g y . Befo re p urs u i n g h i s v o cat i o n as a cl erg ym an , h e s erv eds i x y ears i n th e m i l i t ary
an d fo un d edan i n s u ran ce ag en cy . Th e CJ C i s h ead qu art ered i n El Pas o , Tex as wi th s at el li t e l o cat i o ns i n Al am o g o rd o an d Ph o en ix . Th es e ch u rch es are far fro m each o t h er, an dRev eren d- 4
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[* 4 ] Bro w n h adt o trav el fro m El Pas o t o s o ut h ern New M ex i co an dAri zo n a t o
o v ers ee t h e CJ C’ s n et wo rko f p as t o rs an d el ders
. It ’ s n o t p reci s el y

co rrect t o s ay

th ata m in i s t er i s an en t rep ren eu r, b u t Rev eren dBro wn ’ s ch ari s m at i c p res en ce as a m o t i v at i o n al s p eak er t ap p edm ark et s
o u t s i d e o f t h e CJ C. Th i s l edt o h i s h o s t i n g an d p art i ci p at i n g i n p ub l i c-s p eak i n g
en g ag em en t s b o t h l o cal ly an d acro s s th e n at i o n , wh i ch h e d idth ro u g h h is s o l e p ro p ri et ors h i p , Po wer Co m m u ni cat i o n s Net wo rk (PCN). Th i s i n tu rn l edh i m t o b eco m e h i s o wn i m

p res ari o , atl eas t fo r h i s l o cal ap p earan ces , as h e s ch edul edan d p ai dfo r v en u es , h i redcat erers , an dh an d ledal l ad v ert i si ng an d p art i ci pan t reg i s trat i o n . Inad d i t i o n t o ru n n i n g a t h ri v i n g n et wo rko f ch u rch es an da p ub l i cs p eak i n g an d ev en t -m an ag em en tb u s in es s , h e fo u n d edan dran a t rai n in g o perat i on cal l edDream

M ak ers 9 9
. 5 M rs . Bro wn i s atl eas tas b u s y as h er h u sb an d . Sh e earn ed a d eg ree i n
n u rs i n g an dwo rk edas a m i l i t ary n u rs e b efo re b eg i n n i n g h er career at th e CJ C. At t h e CJ C s h e s erv es as th e ch u rch ad m i n i s t rat o r, as wel l as t h e ad m in i s t rat o r o f t h e CJ C Acad em

y --t h e ch u rch ’ s n urs ery , p res ch o o l , an del em en t ary -s ch o o l p ro g ram . As th e Acad em

y ’ s ad m in is t rat o r, s h e d ev el o p s an d o v ers ees th e cu rri cu l um , h i res

5 St art edi n 1 9 9 9 , Dream

M ak ers 9 9 i s an en t rep ren eu rs h i p cen t er th atp u t s o n s em i nars an dco n t i nu i n g edu cat i o n atan an nu al ev en t fo r b u s i n es s o wn ers i n t eres t edi n i m

p ro v i n g th ei r b u s i nes s p ro du ct i v it y .- 5
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[* 5 ] al l t each ers an ds t aff, p ay s th e b i l ls , an d m an ag es t h e Acad em y ’ s d ai ly
o p erat i o n s . Th es e res p o n si b il i t i es g en eral l y req u i redh er t o b e atthe Acad em y ei g h th o u rs a d ay , M o n d ay thro u g h Fri d ay , fo r al l th e y ears ati s s u e. Sh e
n ev ert h el es s fo u n dt i m e t o d ri v e t h e Rev eren dt o h i s s p eak i n g en g ag em en t s an dt o
m ak e t h e s i x -h ou r ro u n d t ri p trekb et ween th e CJ C’ s El Pas o an dAl am og o rd o l o cat io n s wh en ev er h e h adb ack -t o -b acks erv i ces . M rs . Bro wn al s o acco m p an i ed h i m t o th e CJ C’ s o t h er l o cat i o n s fro m t i m e t o t i m e. 1
. Pars on ag e Al l o wan ce Th e Bro wn s recei vedwh atth ey cl ai m i s a p ars o n ag e al l o wan ce fro m th e CJ C fo r each o f t h e y ears ati s su e. Acco rd i ng t o Rev eren dBro w n , th e CJ C’ s ch u rch b o ardd et erm i n es an dap p ro v es th i s al l o wan ce an n u al l y , an d i n 2 0 0 7 i twas
m ad e i n t h e fo rm

o f tw o p aym en t s o f $ 1 ,7 5 0 d ep o s i t edi n t o th e Bro wn s ’ p ers o n al ch eck i n g acco un teach m on t h . Fo r 2 00 8 an d 2 0 0 9 th e t o t al p ars o nag e p aym en ts
are u n cl ear: Th ere’ s a t rai l o f co n si s t en t l y u n i fo rm p aym en t s i n 2 0 0 8, b u t t h en i t b eco m es h ard er an dh ard er t o fo l l ow i n l at er m o n t h s . Th e CJ C al s o p ai dth e Bro w n s ’ u t i l i t y

b i l l s an d , m o re i rreg ul arl y , o t her s eem i n g l y p ers o n al ex pen s es . 2
. Lo v e Offeri n gs Fro m Co n g reg an t s Li k e m an y

ch u rch es , the CJ C u s es an en v el o p e s y s t em t o co l l ectan d p ro p erl y reco rdo fferi n g s fro m

i t s m em b ers . Th e CJ C h as a s i n g l e en v el o pe fo rm- 6
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[* 6 ] fo r t h i s p u rp os e, wi t h b l an kl i n es fo r co n greg an t s t o fi l l i n th ei r co n tact i n fo rm at i o n , i f t hey

ch o o s e, an ds p aces fo r d ifferen tco n t ri b u ti o n cat eg o ri es n ex tt o wh i ch th ey

can l i s ta d o l l ar am o u n t . Th es e cat eg o ri es i n cl u d e “ t i t h e”, “ o fferi n g ”,

“ b u i l d i ng fu nd ”, an d “ s p eci al g i ft
. ” 6 Co n tri b ut i o n s d es i g n at edfo r t he fi rs tth ree cat eg o ri es are al way s reco rd edi n th e CJ C’ s b oo k s as co n tri b ut i o n s t o t h e ch u rch
. A s p eci al g i ftd es ig n at edfo r Rev eren dBro wn (o r an y o n e el s e) i s n o t edo n t h e
en v el o p e. If o ne o f thes e s p eci al g i ft s was b y ch ecko r cred i tcard , i two u l dfi rs t g o i n t o th e CJ C’ s acco u n t , an dth e b o o kkeep er wo u l dl at er m ak e a ch ecko u tt o th e Bro w n s . No tal l co nt ri b u t i o n s m ad e t o Rev eren dBro wn were m ad e t hro u g h th e
en v el o p e s y s tem , an dth erefo re n o tal l were reco rd ed b y the CJ C. 7

6 As th e CJ C u s es th e t erm s : a “ t i t h e” m ean s “ a t en th o f a m em b er’ s i n co m e” as i n s tru ct edb y

th e Bi b l e; an “ o fferi n g” i s “ wh at ev er [an ] i n d iv i du al wo u l dl i k e t o g i v e t o t h e ch u rch ; ” t he “ b u i l di n g fu nd ” i s fo r d o n at i o n s i n s up p o rt o f ch u rch co n s t ru ct io n an dm ai n t en an ce; an d“ s p eci al g i ft s ” are o fferi n gs m ad e wi t h a “ s p eci al i nt en t i on ,” s u ch as “ fo r [t h e] h eal in g o f a fam i l y m em b er,” o r t o a s p eci fi c p ers o n o n th e ch u rch ’ s s t aff.

7 Th e CJ C’ s b o o kkeep er was n ’ tex act l y cl ear o n wh ath ap p en s wi t h ch eck s . Ato n e p o i nts h e m ad e i ts eem th atal l ch eck s fro m

co n g reg an t s d es i g n at edas s p eci al g i ft s are p uti n to th e s y s t em al o ng wi t h cred it -card p aym en t s , an d Rev eren dBro wn wo u l d g eta ch eckfro m th e CJ C fo r t h e t o t al am o u nt . Bu ts h e al s o t es t i fi edth ato n ly

th e ch eck s m ad e o u tt o th e CJ C, b u ti d en t i fi edas g ift s fo r Rev eren dBro wn wo u l d g o th ro u g h th i s p ro ces s . Th e reco rdi n cl u d es a l arg e n u m b er o f ch eck s fro m

th e CJ C m em

b ers m ad e o u tt o Rev eren dBro w n d i rect l y t h ath e o r M rs . Bro w n d ep o s i t edd i rect l y i n t o th ei r p ers o n al b an k acco u n t . W e t h i n ki t m o re l i k el y

than n o tth ato n ly

cred i t -cardd o n at i o ns an ds p eci al -g i ftch eck s (co n ti n u ed ...)- 7
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[* 7 ] Th e Bro wn s d o n o t t el l m em b ers o f t he co n g reg at io n th at t h es e p aym en t s d es i g n at edas s p eci al g i ft s are t ax -d edu ct i b l e. B. A Tas t e o f Bu ffal o Th e Harri ses are m em

b ers o f t he CJ C an db ecam e fri en d s o f Rev eren dan d M rs . Bro wn . By

th e t i m e t hey

m etth e Bro wn s , th e Harri s es h adal read y o pen ed
an d cl o s edth ei r fi rs t res t au ran t , b u twere eag er t o g etb acki n t o th e b u s in es s . Th e Harri s es g radu al l y

co n cl u d ed , aft er s o m e d i s cu s s i on wi t h th e Bro wn s , th atth ey
wo u l dh av e m o re s u cces s i f they co m b i n ed effo rt s an d wen ti n to b u s i n es s t o g et h er. Th e Harri s es h adth e res tau ran tequ i p m en tan dthe ex p eri en ce; th e Bro wn s h ad cap i t al fro m

th ei r s ucces s fu l v en tu res , an dRev eren dBro wn i n p art i cu l ar h ada g o o dd eal o f p ract i cal b u s in es s kn o wl ed g e. Bo t h co up l es tho u g h t t h es e d i v ers e
res o u rces wo u l dco m

b i n e wel l an dm i g htl eadt o s u cces s t h e s eco n dt i m e aro u n d
. On e p art ners hi p ag reem en tan da g o o d d eal o f p lan n i ng l at er, A Tas t e o f Bu ffal o , LLC (ATOB), o p en edi t s d oo rs i n M arch 2 0 0 8 . Th e co up l es ag reed t o o w n ATOB
as equ al p art n ers an dt o m ak e M r. Harri s t h e m an ag er. ATOB was t o b e a co u n ters erv i ce res t au ran t , s o the Harri s es an dthe Bro wn s l i m i t edth ei r s taff t o ab o u t“ s i x

7 (...co n t in u ed ) fro m co ng reg an t s th atwere m ad e o utt o th e CJ C were en tered i n t o th e CJ C’ s s y s t em th i s way . W e fi n dth atch eck s m ad e o u t t o Rev eren d Bro wn were g i v en t o h i m d i rect l y , ev en i f fi rs tco l l ect edb y the CJ C du ri n g a ch urch s erv i ce.- 8
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[* 8 ] o r s ev en ” atan y g i v en t i m e t o wo rkth e cas h reg is t er an d t he fo odco u n t er. Al l o f ATOB’ s em

pl oy ees were h i redb y

an d rep o rt edt o t h e Harri s es . Th e Bro wn s were n o tju s ti n v es t o rs , h o wev er. Th ey were es p eci al ly

act i v e du ri n g th e s t art up o f t h e b u si n es s : Th ey trav el edt o Al am og o rd o t o m eetwi t h real to rs an dco n tract o rs t o s co u td i fferen t l o cat i on s an dl o o katequ i p m en t , h el p ed p i ckth e s au ces th atare an es s en t i al p art o f t h e Bu ffal o wi n g ex p eri en ce, an dch o s e t h e res t au ran t ’ s fu rn i s h i n g s . As th e o p en i n g ap p ro ach ed , th e Bro wn s h el p ed i n s t al l s o m e o f the fi x tu res an dcreat e a m en u . Bu t t h e Harri s es al s o p art i ci p at ed i n the h u n tfo r t he ri g h tl o cat io n an dm an ag edATOB’ s d ay -t o -d ay o p erat io n s o n ce i t op en ed . ATOB was cl o s edo n Su n d ay s , b u t t h e Harri s es s p en taro u n d 1 2 h o u rs atthe res t au ran t al l o t h er d ay s o f t h e week . Th e Bro wn s , i n co nt ras t , were t h ere
o n l y tw o o r t h ree t i m es a weekt o b ri n g n eed ed s up p l i es fro m El Pas o , p l an an d d raft ad v ert i si ng , an dg en eral l y h el p wi t h “ [j] u s twh at ev er n eed edt o g etd o n e.” Rev eren dBro wn al s o h an d l ed ATOB’ s fi n an ces --h e was th e p art n er i n ch arg e o f
o rd eri n g an dtrack i n g s up p l i es , an dh e wro t e ch eck s as b i l l s cam e du e an dp ayro l l
n eed edt o b e m ad e. Bey o ndth i s th e Harri s es l oo k edt o th e Bro w n s fo r m o ral
s up p ortan dh el p wi t h “ cert ai n l i t t l e t hi n gs ” t o “ [s ] t ay [] i n i t.” M r. Harri s
es t i m at edth atRev eren dan dM rs . Bro wn s pen tan av erag e o f 5 0 h o u rs each week , o n s i t e an do ffs i t e, o n ATOB duri n g th e y ears ati s s u e al t h o u g h h e n ev er actu al l y- 9
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[* 9 ] k ep t t rack . Th e Bro wn s were m o re p reci se, an dcl ai m edt o h av e s p en ta m o re p l au s i b l e 7 1 4 h o u rs atATOB i n 2 00 7 , th o u g h al l the wh i l e Rev eren dBro wn
co n ti n u edt o ru n th e CJ C, Dream M ak ers 9 9 , an dPCN. Ev en tho u g h al l the wi t n es s es ag reed thatATOB “ h adv ery g o o dfo o d ,” Al am o g o rd o ’ s ap p et i t e fo r Bu ffal o wi n g s was s m al ler t h an th ey h adex p ect ed . By t h e en do f 2 0 0 9 ATOB s t il l h ad n ’ tearn eda p ro fi t , an di t s pu t tered t o a s t o p i n M arch 2 0 1 0
. Th e Bro wn s s t o o dt o l o s e t h e m o s t fro m ATOB’ s fai l u re, s i n ce--
s h o rto f t h e Harri s es ’ co v eri n g s o m e g ro ceryb i l l s h ere an dth ere--t h ey h adb een t h e o n ly s o u rce o f t h e res t au ran t ’ s cap i t al . An d t h e Bro wn s d educt edn o np as s i v e l o s s es o f aro u n d $ 3 0 , 0 0 0 fo r b o t h 2 0 0 7 an d2 0 0 8. Th e Harri ses an dth e Bro wn s
were n o t d o n e wi t h t h e res t au ran tb u s i n es s, t h o u gh . W it h in a y ear o f ATOB’ s cl o s i ng , th ey

g av e i n t o l o cal t as t es an do p en edCh i -To wn Barb ecu e i n Fo rtBl i s s , Tex as . Th i s cu i s i ne p ro v edm o re p o p u l ar, an d t he res t au ran twas ru n n in g
s m o o t h ly as o f t he t i m e o f t ri al
.- 1 0 -

[* 1 0 ] C. Sch edu l e C Ex p en s es Th e Bro wn s cl ai m edl arg e d edu ct i o n s fo r car ex p en s es o n thei r 2 0 0 7 -0 9 Sch edu l es C, Pro fi t o r Lo ss Fro m Bu s i n es s , 8 b u t t h e Co m

m i s s io n er t h o u g h tth ey ’ d
o v ers erv edthem s el v es an dd is al l o wedch u nk s o f th es e d edu ct i on s . Here’ s a t ab l e:
Year Sch edu l e C l eas e an d

v eh i cl e ex p en s es ati s s u e Al l o wed Co n t es t ed 2 00 7 $ 1 8 ,0 0 0 $ 1 4 ,6 5 9 $3 ,3 4 1 2 00 8 2 7 ,2 5 0 2 3 ,1 63 4 ,0 8 7 2 00 9 1 8 ,8 0 1 1 1 6 ,5 45 2 ,2 5 6

1 Th i s i s th e am o u n t l i s t edb y th e Co m m is s i o n er i n th e n ot i ce o f d efi ci en cy . Fo r s o m e reas o n, i n b o t h th e Co m m i s s io n er’ s an s w eri n g b ri ef an dthe Bro wn s ’ rep l y b ri ef, t h i s n u m

b er was ch an gedt o $ 5 2 ,8 91 . W e aren ’ ts u re wh ere t h i s n u m b er cam e fro m , b u tth e p art i es ag ree t hato n l y $ 2 ,2 5 6 o f t he Bro wn s ’ 2 0 0 9 car ex p en s es i s co n tes t ed
. Th e Bro wn s i n t ro du ced t wo car l eas es i n t o th e reco rd --o n e t h atran fro m 2 0 0 3 t o 2 0 0 7 , an dan ot h er fro m 2 0 0 7 t o m i d -2 01 1 . Th e m o nt h ly p aym en ts o n th e t wo l eas es s h o w y earl y

t o tal s o f ab o ut$ 1 5 ,0 0 0 fo r 2 0 0 7 --a y ear t h at s aw a th reem o nt h g ap i n l eas i n g ex p en s es --an dab o u t $ 2 2 , 0 0 0 fo r b ot h 2 00 8 an d2 0 0 9 . Th e Bro w n s d i dn o tp ro du ce an y o t h er reco rdo f t h ei r car-rel at edex p en s es . Rev eren d

8 Th e Bro w n s rep ort edth ei r v eh icl e ex p en s es d i fferen t l y each y ear. Fo r 2 0 0 7 , th ey

l i s t edth em

as “ [r] en to r l eas e” o f “ [v ] eh i cl es , m ach in ery , an d eq u ip m en t ; ” fo r 2 0 0 8, as “ [c] ar an d t ru ckex p en s es ; ” an dfo r 2 0 0 9 , as “ [o ] t h er ex p en s es .”- 1 1 -

[* 1 1 ] Bro wn d i drefer t o a m il eag e l o g i n h i s t es t i m o n y , b u td idn o t i n t ro du ce i tat t ri al . Th e Bro w n s ad m i t t edth atth ey u sedth e l eas edcars fo r b ot h p ers o n al an d b u s i n es s p u rp o s es . D. Ret u rn Prep arers , Au d i t , an dTri al Th e Bro wn s h iredtwo d ifferen tp rep arers fo r t hei r 2 0 0 7 -0 9 retu rn s . Th ei r l o n g t i m e t ax p rep arer, Geral dBl aes , draft ed b o t h th ei r p ers on al an d ATOB’ s p art n ers hi p return s fo r t ax y ear 2 0 0 7 . M r. Bl aes i s n o t a l i cen s edacco u n tan t , b u t h e h as a d eg ree i n acco u n ti ng an dh adp rep ared return s s i n ce “ th e l at e ‘ 8 0 s , earl y

‘ 90 s .” M r. Bl aes was an en g ag i n g an dcred i bl e wi tn es s . W e b el i ev edh i m wh en h e s ai dh i s cl i en tp o l i cy

was s i m p l e: “ If y o ul i e t o m e an dI fi n do u t ab ou t i t , y o u
can fi nds o m eb o d y

el s e t o d o y o u r t ax es .” W e b el i ev ed M r. Bl aes wh en h e s ai d t h atRev eren dBro wn n ev er as kedh im t o “ fu d g e t he rep o rt s ” an dth at , t o h is kn o wl ed g e, Rev eren dBro wn n ev er l i edt o h i m . W e al s o b el i ev edh i m wh en h e
s ai dth ath e d i dn ’ tfeel fu l l y co m fo rt ab l e p rep ari n g ATOB’ s p art n ers h i p ret u rn b ecau s e o f h i s l acko f ex p eri en ce wi t h s u ch retu rn s , an dth ath e as k edRev eren d Bro w n t o h av e i t rev i ewedb y a CPA b efo re fi l i n g . W e d o fi n d t h atM r. Bl aes
as k edfo r an drecei v eds o m e i n fo rm at i o n t hath e u s edt o p rep are t h e ret u rn s . Bu t h e n ei t h er as k edfo r n o r kn ew an yt h i n g ab ou t t h e ex ten to f t h e Bro wn s’ p art i ci p at i o n i n ATOB. He al s o d i dn o tas k , an d was n o tt o ld , ab o u t t h e- 1 2 -

[* 1 2 ] co ng reg an t s’ g i ft s m ad e t o Rev eren d Bro wn ; t h e Bro wn s s i m pl y g av e h i m

a Fo rm 1 0 9 9 -M ISC, M i s cel l an eo u s In co m e, creat edb y th e CJ C’ s b oo kkeep er, wh i ch M r. Bl aes u s edt o p rep are t h e ret u rn . It ’ s u n cl ear wh et h er t h e Bro wn s fo l l o wed M r. Bl aes ’ ad v i ce t o h av e ATOB’ s 2 0 0 7 return rev i ewedb y a CPA m o re fam i l i ar wi th p art n ers hi p t ax at i o n b efo re t h ey

fi l edi t . Bu tt ax y ear 2 0 0 7 was th e l as tt ax y ear M r. Bl aes p rep ared ret u rn s b efo re h e ret i redfro m th e b u s i n es s . Th e Bro w n s tu rn edt o Teres a Sel f t o p rep are t hei r 2 0 08 an d2 0 09 t ax retu rn s . M s . Sel f is a CPA, an dh add o n e s o m e
acco u n t in g fo r t h e CJ C. Sh e, h o wev er, u s u al l y as k edh er cl i en t s o n l y

fo r a
s u m m ary o f ex p en s es an dt o tal s s i nce “ y o utru st[t h at ] th e cl i en t [s ] ” h av e th e
reco rd s t o s upp o rtth ei r p o s i t i o n s i f t h ey s ay th ey d o . Sh e’ do ccas i o n al ly

as ka cl i en t t o co n fi rm

a n u m b er i f “ s o m et h i n g was o u to f wh ack ,” an d t h en th ey ’ d

“ d i scu s s wh et h er i two ul dg o o n th e ret u rn o r n o t .” An d s he fo ll o wedh er u s u al
m et h o d wh en s h e p rep aredth e Bro wn s ’ retu rn s . Sh e n ei t h er s aw n o r as k edfo r l o g s o f h o u rs t h e Bro wn s s pen two rk in g fo r ATOB o r fo r an y o t h er d o cu m en t at i o n t o s up p o rtth e Bro wn s ’ d edu ct i o n s . Sh e t o o s ai ds h e was u naware t h atth e Bro wn s recei v edm o n ey

fro m p ari s h io ners an d t h erefo re d i dn o tad v is e th em as t o t h e t ax ab i l i t y o f s u ch am o u n t s. An dM s . Sel f al s o d i dn o th av e m u ch ex p eri en ce wi t h p rep ari n g p art n ers h i p retu rn s , fi l l i n g o u t“ [m ] ay b e t wo o r t h ree * * * a y ear.”- 1 3 -

[* 1 3 ] Th ou g h th e Bro wn s cl ai m th atp art n ers h i p retu rn s fo r ATOB were p rep ared
an d fi l ed , th e Co m

m i s s i on er h as n o reco rdo f th em fo r an y o f t he y ears ati ss u e. Th e Bro wn s ’ au d i tb eg an wi t h th ei r 2 0 0 7 t ax y ear, an dRev en u e Ag en t(RA) Kev in Frei t as s u s p ect eddu ri n g i t s co u rs e t h at t he Bro wn s h adn o tk ep t ad eq u at e
reco rd s o f t h ei r i n co m e. He th erefo re d eci d edt o an al y ze t h ei r b an kd ep o s i t s . He
s t art edwi t h 2 00 7, a y ear wh en th e Bro wn s h ad a ch eck in g acco u ntatW el l s Farg o
an d Rev eren dBro wn h ad an acco un tatIn t er Nat i on al Ban k . RA Frei t as ad d edth e t o t al d ep o s i t s m ad e i nt o thes e two acco u n t s an d t h en s ub t ract edwh atth e Bro wn s rep o rt edas i n co m e o n t h ei r ret u rn . Th es e d ep o s i t s al m os tal l cam e fro m the CJ C
an d Rev eren dBro wn ’ s s p eak i n g en g ag em en t s . Becau s e t h e d ep o s i t s far ex ceed ed t h ei r rep ort edi n co m e fo r t h e y ear, h e as k edthe Bro wn s t o i d en ti fy as m an y o f t h e d ep os i t s as th ey co ul d s o th ath e co ul d ex cl ud e an y n o n t ax ab l e i tem s (e.g ., i n s u ran ce p ro ceed s , refi nan cedl o an s , g i ft s). Aft er m ak i n g s o m e ad j u s t m en t s , h e arri v edata t o t al o f m o re t h an$ 1 5 0 ,0 0 0 i n u n d errep o rt edg ro s s i n co m e fo r t h e y ear. Th i s p ro m

p t edh i m t o d o a s i m il ar an al y s i s o f t h e Bro wn s ’ 2 00 8 an d2 0 0 9 d ep os i t s , an d h e co n cl ud edth atth e Bro wn s h adu n d errep o rt edi n co m e b y m o re t h an $ 20 0 ,0 0 0 fo r t ax y ear 2 0 0 8 , an db y n earl y $ 12 0 ,0 0 0 fo r t ax y ear 2 0 0 9 . Fo r t h es e t w o y ears , h o wev er, RA Frei t as d i dn o ts i td o wn wi t h th e Bro wn s t o g o o v er each d ep os i t
.- 1 4 -

[* 1 4 ] Aft er t h e au d i t, th e Co m m i s s i o n er i s s u eda n o t i ce o f d efi ci en cy fo r al l th ree t ax y ears i n wh i ch h e m ad e s ev eral ad ju s t m en t s an d s ai dth e Bro wn s were l i ab l e fo r p en al t i es u n der s ect i o n 6 6 6 2 (a). 9 Th e Bro wn s d i s ag reed an dt i m el y p et i t i o n ed
o u r Co u rt . W e t ri edth e cas e i n El Pas o . 1 0 W e m u s td eci d e wh et h er:

• t h e Bro wn s u n d errep o rt edth ei r Sch edul e C g ro s s recei p t s an d, m o re s p eci fi cal l y , wh et h er th ey can ex cl u d e an y

o f t h i s i n co m e as p ars o n ag e al l owan ces o r g i ft s fo r t ax y ears 2 0 0 7-0 9 ;

• t h ei r Sch edu l es E, Supp l em en t al In co m e an dLo s s , l o ss es fro m ATOB are s ub

jectt o th e p as s i v e-l o ss l im it at i o n ru l es fo r t ax y ears 2 0 0 7 an d2 0 0 8 ; 1 1

• t h ey

are en t i t l edt o d i s al l o wedd edu ct i on s fo r Sch edu l e C car ex p en s es fo r t ax y ears 2 0 0 7 -0 9 ; an d

9 Al l s ect i o n referen ces are t o t h e In t ern al Rev en u e Co de i n effect fo r t h e y ears ati s s u e, an dal l Ru l e referen ces are t o t h e Tax Co u rtRu l es o f Pract i ce an d Pro cedure.

1 0 Th e Bro wn s l i v ed in Tex as atal l rel ev an tt i m es , wh i ch m ean s th is cas e i s p res u m p t i v el y ap p eal ab l e t o t h e Fi ft h Ci rcu i t . See s ec. 7 4 8 2(b )(1 )(A).
1 1 ATOB’ s s t atu s i n 2 0 0 9 i s o b s cu re. Ith ad n ’ tcl os ed y et , b u t t h e Bro wn s cl ai m edn o l o s s es fro m

ATOB o n th ei r 2 0 0 9 i n co m e t ax retu rn , wh i ch l i k el y l ed t h e Co m m i s s i o n er n o tt o au d i t ATOB’ s d i s t ri b u t i v e s h ares o f ex p en s es th aty ear. An dju s t as fo r t h e 2 0 0 7 an d2 00 8 t ax y ears , th e Co m m i s s i o n er h as n o reco rdo f a 2 0 0 9 p art n ers h i p retu rn ’ s b ei n g fi l edfo r ATOB.- 1 5 -

[* 1 5 ] • t h ey

are l i ab l e fo r accu racy -rel at edp en al t i es fo r al l y ears at i s s u e. 1 2 OPINION I. Un d errep o rt edIn co m e Th i s i sn ’ tthe fi rs tcas e wh ere a p as to r d i d n o t rep o rt as t ax ab l e i n co m e s o m e
o f t h e m o n ey

recei v edfro m

h i s co n g reg at i o n . See, e.g ., Fel t o n v . Co m m i s s i o n er, T.C. M em o . 2 01 8 -1 6 8 . As we ex p l ai n edth ere, t h e rel at i o n s h ip b et ween a p as t o r
an d h i s co n g reg at i o n i s n ot t y p i cal l y v i ewedas co m

m erci al , wh i ch m ak es th e l i n e b et ween g i ft s an dco m

pen s at i o n b l u rri er t h ani n l es s s acred p l aces . Bu twe b eg i n wi t h a m o re d et ai l edrev i ew o f h o w th e Co m m i s s i on er d et erm in edth atth e Bro wn s
cam e up s h o rt o n th ei r rep o rt edi n co m e. A. Ban k -Dep o s i t s An al y s i s Wh en a t ax pay er d o es n o tk eep ad eq u at e reco rd s o f h is i n co m e, t h e Co m m i s s i o n er m ay

reco ns t ru cti t , s ee s ecs . 6 00 1 , 4 4 6 (b ), an dm ay an al y ze t h e t ax p ay er’ s b an kd ep o s i t s t o d o s o , s ee Park s v . Co m m i ss i o ner, 9 4 T.C. 6 5 4 , 6 5 8 (1 9 9 0). A b an k -d ep os i ts an al y s i s as s u m es th atal l m o n ey d ep o s i tedi n a t ax p ay er’ s

1 2 W e d o n ’ tn eedt o d eci d e wh et her t h e b u rd en o f p ro o f s h i ft edt o t h e Co m m i s s i o n er b ecau s e we were ab l e t o d eci d e each i s su e b y a p rep o n d eran ce o f ev i d en ce. See Kn u d sen v . Co m m i s s i o n er, 1 3 1 T.C. 1 8 5 , 1 88 -8 9 (2 0 0 8 ) (ci t i n g Bl o dg et t v . Co m

m i s s i o n er, 3 94 F.3 d1 0 3 0 , 1 03 9 (8 t h Ci r. 2 0 0 5 ), aff’ g T.C. M em o . 2 0 0 3 -2 1 2 ).- 1 6 -

[* 1 6 ] b an kacco u n t du ri n g a g iv en p eri odi s t ax ab l e i n co m e, an du n ex p l ai n ed d ep os i t s are co n si d ered p r i ma f a ci e ev id en ce o f i n co m e. See To k ars k i v . Co m m i s s i o n er, 8 7 T.C. 7 4, 7 7 (1 9 8 6 ); s ee al s o Pri ce v . Un i t ed St at es , 3 3 5 F.2 d 6 7 1 , 6 7 7 (5 t h Ci r. 1 9 6 4 ). Tax p ay ers th en h av e t h e b u rd en t o s h o wthats u ch d ep os i t s s h o u l d n ’ t b e t ax edb ecau s e t h ey were i n heri t an ces , l o an p ro ceed s , t ran s fers fro m

an o t h er p ers o n al acco u n t , o r o t h er n o nt ax ab le t ran s fers . See Pri ce, 3 3 5 F.2 dat6 7 7 . Th e Co m m is s i o ner h as t o s ub tract rep o rt edi n co m e an di n co m e fro m n o nt ax ab l e s o u rces th ath e kn o ws ab o u t . Id . If t ax p ay ers b el iev e t h e Co m m i s s i o n er’ s m etho do f co m p u t at i o n i s u n fai r o r i n accu rat e, h owev er, t h ey h av e th e b u rd en t o s h o wth atu n fai rn es s o r i n accu racy . Id
. Th e Bro wn s fi rs tcl ai m

th atRA Frei t as fai l edt o co n ducta fu l l i n v es t i g at i o n fo r t h e 2 0 0 7 t ax y ear, b u tth ey rai s e n o i s s u e wi t h an y p art i cu l ar p arto f h i s
an al y s i s. Fo r t hei r 2 0 0 8 an d 2 0 0 9 t ax y ears , th e Bro wn s l i k ewi s e cl ai m th atRA Frei tas “ d i dn o tp ro p erl y

em p l o y th e b an kd ep o s i tm etho d ” an d“ m erel y
s ub t ract ed ” th e Bro wn s ’ rep o rt edi n co m e fro m thei r t o tal b an kd ep o s i t s. Th ey
as s ertth atth i s m ean s th ey h av e “ d em o n s t rat [ed ] th atRes p o n d en t [] ’ s d et erm i n at i o n i s erro neo u s ” an dth erefo re t h e b urd en o f p ro o f s h i ft s b ackt o th e Co m m i s s i o n er t o s h o w th ath i s an al y s i s was co rrect . Th e Co m m is si o n er d i s ag rees .- 1 7 -

[* 1 7 ] W e fi n dn o t h i ng wro n g wi t h th e way RA Frei t as d i dh i s an al y s i s o f th e Bro w n s ’ 2 0 0 7 t ax y ear. He rev i ewedal l th e d ep o si t s wi t h th e Bro w n s , an d
rem o v ed(o r s ub t ract edas n o n tax ab l e) a g o o dm an y o f t h em . Iti s tru e t h ath e d i d
n o td o an i t em -b y -i tem

rev i ew o f h i s an al y s i s wi t h t h e Bro wn s o f t hei r 2 0 0 8 an d 2 0 0 9 t ax y ears , b u tth ere’ s n o t hi n g thatreq u i res h i m t o d o s o . Th e Bro wn s were free t o p o i n to u tattri al al l th e d ep o s i t s i n th o s e y ears th atth ey b el i ev edwere
n o n t ax ab l e. Th ey

d i d cl ai m

th atth ey refi n an cedth ei r h o m e i n “ 20 0 7 o r ‘ [0 ] 6 ” an d t ran s ferred p i eces o f t h e l um p s u m th at t h ey recei vedi n t o t h ei r p ers o n al ch eck i ng
acco u n t fro m

t im e t o t i m e. Th ey

al s o cl ai m

th atUSAA g av e t h em

$ 2 5 ,0 0 0 , o r

“ s o m ewh ere ab o u t t h at ,” i n i n su ran ce p ro ceed s fo r wat er d am ag e t o th ei r h o m e. Bu t t h ey fai l edt o b ackup thes e cl ai m s wi t h an y p ap erwo rkth ats h o wed a refi n an ci n g o r i n s u ran ce cl ai m . An dth i s fai l ure, wh en we co m b i n e i t wi t h a l ack
o f s p eci fi ci t y

as t o d at es an d am o u n ts , l ead s u s t o fi ndth ati ti s m o re l i kel y th an
n o tth atn o n e o f t h e l arg e d ep o s i t s fo r an y o f t h e y ears ati s s u e were n o n t ax ab l e l o an o r i n s u ran ce p ro ceed s . Th ey qu es t i o n RA Frei t as ’ s an al y s is , b u twi t h o u t
s p eci fi c ev i d en ce t h ath e i n cl ud eds p eci fi c d ep o s it s t hath e s h o u l d n ’ th av e, t h ei r qu es ti o n s are fru i t l es s . W e d i dl o o k atth e reco rdo u rs el v es , an d d i d fi n d a h an d fu l o f s m al l d ep o s i t s t h atwe t h i nkare m o re l i k el y th an n o tn o n t ax ab l e--a $ 1 0 0 p aym en tfro m- 1 8 -

[* 1 8 ] Co u n t rywi d e Ho m e Lo an s , In c., o n J an u ary 1 0 , 2 0 08 , th ats eem s t o b e a
s m al l l o an ; a M arch 1 0 , 2 0 08 , p aym en to f $ 1 8 0 fro m W el l s Farg o Ho m e M o rt g ag e

“ fo r p aym en t o f es cro w t o m ort g ag o r” t h ats eem s t o b e a refu n do f o v erp aym en t ;
an d t wo i n su ran ce p aym en ts fro m Ch ub b Ll o y d s In s u ran ce Co m p an y o f Tex as t o t al i n g $ 1 ,4 9 0 o n J u l y

2 3 an dSep t em

b er 8 , 2 0 0 9 . W it h th es e s m al l ex cep t i o n s , we fi n di tm o re l i k el y

th an n ot t h atRA Frei tas ’ s an al y ses fo r al l th ree y ears were
co rrect
. B. Pars on ag e Al l o wan ces an d Gi ft s Th i s co n cl u s i o n, h o wev er, i s o n l y as t o th e t ot al o f p o t en t i al ly t ax ab l e
am ou n t s . Th e Bro wn s ’ m ajo r arg u m en ti s th atm an y o f t h o s e d ep o s i t s are
n o n t ax ab l e ei t her as p ars o n ag e al l o wan ces o r as g i ft s . W e l o o kat each p o s s i b i l i t y i n tu rn . 1
. Pars on ag e Al l o wan ces Sect io n 1 0 7 (2 ) 1 3 s ay s thata m i n is t er d o es n o t h av e t o i ncl u d e i n g ro s s i n co m e “ t h e ren tal al lo wan ce p ai dt o h i m as p arto f h i s co m

p en sat i on , t o th e ex ten t
u s ed by h i m t o ren to r p ro v id e a h o m e.” Th i s ex cl u s io n i s l i m i t edt o th e am o u n t
u s ed “ t o ren to r p ro v id e a h o m e” an dm ay “ no tex ceed th e fai r ren tal v al u e o f t h e

1 3 Th e Sev en t h Ci rcu i tv ery recen t l y up h el dth e co n s t i tu ti o n al i t y o f s ect i o n 1 0 7 (2 ) i n Gay lo r v . M n u ch i n , 9 1 9 F.3 d4 2 0 , 4 3 7 (7 t h Ci r. 2 01 9 ).- 1 9 -

[* 1 9 ] h o m e.” Id . Th i s m ean s th e ex cl u s i o n d o es n o tap p l y t o m o n ey u s edfo r fo o d , d o m es t i c h el p , o r ex p en s es o f a b u s i n es s o r i n v es t m en t p ro p ert y . See s ec. 1 .1 07 -1 (c), In co m e Tax Reg s . Th e p art i es ’ fi rs td i sag reem en ti s wh et h er t he Bro wn s ev en rai s edth i s i s s ue fo r u s t o d eci d e. Th i s i s i m po rt an t , b ecau s e RA Frei t as co u n t edth e Bro w n s ’ al l eg edp ars on ag e al l o wan ces as t ax ab l e d ep os i t s i n h is an al y ses . Th e Co m m i s s i o n er ad m i t s th ath e d i dn o ts p eci fi cal l y d i s al l o w an y

p ars o n ag e al l o wan ce i n the n o t i ce o f d efi ci en cy , b u targ u es th atth e Bro wn s “ fai l edt o rai s e t h i s p o i n ti n th ei r o p en i n g b ri ef.” W e d i s ag ree, an d fi n dth atth e Bro wn s k ep tth i s i s s ue al iv e. Th e Co m m i s s i o n er’ s ad m i s s i o n t h ath e d i dn o ts ub t ract an y p ars o n ag e al l o w an ce fro m g ro s s d ep o s i t s i n h i s co m pu t at i o n o f t h e Bro wn s ’ u n rep o rt edi n co m e i s an i m p l i ci t
as s ert i o n th at , i f t h ere was an y al l o wan ce, t h e Co m

m i s s io n er wan t s t o t ax i t . In t h ei r p et i t i o n , th e Bro wn s s p eci fi cal l y al l eg edth ats o m e o f t h e d ep o si t s were p ars o n ag e al l o w an ces . Th ey al s o d i s cu s s ed t he i ss u e o f p ars o nag e al l o wan ces i n t h ei r p ret ri al m em o ran du m . An dth ey t es t i fi edab o u ti tat t ri al wi th o u to b ject i o n . Th e Co m m is s i o n er p o i n t s t o Lu n s fo rd v . Co m m i s s io n er, 1 1 7 T.C. 1 83 , 1 8 7 (2 0 0 1), an dNi ck l au s v . Co m m i s s i o ner, 1 1 7 T.C. 1 1 7 , 1 2 0 n .4 (2 0 01 ), as p reced en t i n h i s fav o r. In Lu n s fo rd , 1 1 7 T.C. at1 8 7 , th e t ax p ay er rai s edo n ly o ne i ss u e an d- 2 0 -

[* 2 0 ] th en fai ledt o fi l e a p o s tt ri al b ri ef. W e co u l d h av e ju s t h el dth ata fai l u re t o fi le a p os t t ri al b ri ef p u tth e t ax p ay er i n d efau l t , b u twe h ed g eda b i tan db o l s t ered
o u r co ncl u s i o n o f wai v er b y n o t i n g th at“ [i ] n t h e i n s t an tcas e, we t h i n k i ti s atl eas t
as cl ear t h atp et it i on ers h av e ab an d o n edan y arg u m en t s thatwere n otrai s edi n t h ei r p lead i n g s an d t ri al m em o ran du m .” Id
. In Ni ck l au s, 1 1 7 T.C. at1 2 0, t h e t ax p ay ers d i dfi l e a p o s t t ri al b ri ef, b u ts ai di n i tth atth ey wan t edt o fi g htab o u to n e
an d “ o n ly ” o n e i s s u e. Th ataffi rm at i v e s t at em en twas en o u g h fo r u s t o treat th e t ax p ay ers as ab an d o n i n g o t her i s s ues . Id . at1 20 n .4 . W e s ee n o wai v er o f t h e i s su e as we d i di n Ni ck l au s , an dth e Bro wn s d i drai s e t h e i s s u e i n t h ei r p l ead i n g s
an d i n th ei r t es t i m o n y

at t ri al . W e t h erefo re fi n d t hatth ei r fai l u re t o arg u e t h e p ars o n ag e al l o w an ce i ss u e i n th ei r o p en i ng b ri ef d o es n o tm ean th ey ab an d o n edi t
. Th e real p ro b l em

fo r t he Bro wn s i s n o tth i s p ro cedu ral qu ib b l e, b u t t h e l aw’ s req u i rem en tth ata p ars o nag e al l o wan ce b e “ d es i gn at ed ”. Sec. 1 .1 0 7 -1 (b ), In co m e Tax Reg s . Th i s m ean s t h atth e al l o wan ce m u s t b e s p eci fi edi n am o u n tat
s o m e p o i n tb efo re a m in i s t er recei v es i t --a m i n i s t er can ’ tju s t d i p i n to ch u rch fu n d s t o p ay h i s h o us i n g ex p en s es as t h ey ari s e. An da p aym en t t h at i s n ’ td es i g n at ed i s n’ t ex cl u d ab l e fro m

i nco m e. See i d .; s ee al s o Bo y er v . Co m m is si o n er, 6 9 T.C. 5 2 1 , 5 3 4 (1 9 7 7). Tax l aw h as n o rub ri c fo r d es i g n at in g an al l o wan ce--i tcan b e a
s u m o f m o n ey

wri t ten i nt o an em

p l oym en tco n tract , a l i n e i t em i n a ch u rch ’ s- 2 1 -

[* 2 1 ] b u d g et , a n o t at i o n i n t h e m in u t es o f t h e ch u rch ’ s b o ard , o r an y o t her d o cu m en tth atp ro v es o ffi ci al act i o n was t ak en . Sec. 1 .1 0 7 -1 (b ), In co m e Tax Reg s. Itd o es n ’ tev en n eed t o b e i n wri t i ng . See Li b m an v . Co m m i s s i o n er, T.C. M em o. 1 9 8 2 -3 7 7 , 4 4 T.C.M . (CCH) 3 7 0, 3 7 2 (1 9 8 2). Bu tt o qu al i fy as a d es i g n at i o n , i tm

u s tcl earl y i d en t i fy

th e p aym en to f a ren tal al l o wan ce as d is t i n ct fro m a s al ary o r o t h er co m

p en s at io n . Ki zer v . Co m m i s s io n er, T.C. M em o . 1 9 9 2
- 5 8 4 , 1 9 9 2 W L 2 3 8 7 8 1 , at* 2 -* 3
. Th at ’ s a p ro b l em

fo r t he Bro w n s . Th ey

i n tro du ceda l o g o f t h e ch eck s wri t ten b y

th e CJ C fo r t h ei r p ars o n ag e al l o wan ce i n 2 0 0 7, an dth e l o g s h ows th at t h ey recei v eda ch eckfo r $ 1 ,7 5 0 twi ce a m on t h fo r t h e en ti re y ear. Acco m p an y i n g t h e l o g were i m ag es of t h e ch eck s, each o n e b eari n g “ Fo r: Co m p an dPars o n ag e”
o n i t s m em o l i n e. Th e Bro w n s , h o wev er, d i dn oti n t ro du ce s u ch a l o g fo r 2 0 0 8 o r 2 0 0 9 . Atthe b eg i n n i n g o f 2 0 0 8 there are aro u nds i x ch eck s fro m th e CJ C fo r $ 1 ,7 5 0 wi t h “ Co m

p an dPars o n ag e” wri t t en o n t h e m em o l i n e, b u t t he d es i g n at i o n
o f s ub seq u en tp aym en t s i s u n cl ear. Th ere’ s a “ pars o n ag e” ch eckwri tt en b y th e CJ C atth e v ery

en d o f M arch 2 0 0 8 fo r $ 8,0 0 0 --an am o u n t wel l b ey o n dth e t y p i cal p aym en t s--an do n e fi n al ch eckfo r $ 1 ,7 50 i n Ap ri l 2 0 0 8 . Th i s i s th e l as tch eck t h ats p eci fi es o n t h e m em o l i ne t h ati t was fo r “ p ars o n ag e”. An d wh i l e we h av e fo u n d o t h er b i m o n t h l y

ch eck s fo r t h e Bro wn s i n th ei r b an ks t at em en t s fo r b o t h- 2 2 -

[* 2 2 ] y ears , th ere’ s n o t h i n g th atwo u l dl etu s fi n di t m o re l i k el y th an n otth atth ey were p aym en t s fo r a p ars o n ag e al l o wan ce. Th i s m ak es th e qu es t i o n o f wh et h er th e CJ C p ro p erl y d es ig nat edth es e p aym en t s d i ffi cu ltan dp ro o f t h atth e Bro wn s actu al l y s p en tthe m on ey

o n h o u s i n g
ev en hard er t o fi n d . Rev eren d Bro wn t es t i fi edth atthe CJ C’ s ch u rch b oard ap p ro v edh i s p ars o nag e al l o wan ce at t h e s t arto f each cal en d ar y ear b as edo n l o an d o cu m en t at i o n th ath e p ro v i d ed . W e co ul d fi n d n o s p eci fi c res o l u t io n th atg ran ted Rev eren dBro wn a p ars o n ag e al l o wan ce, b u tatl eas tfo r 2 0 0 7 we fi ndth at t h e CJ C’ s p ract i ce o f reg u l ar p aym en t o f a reg ul ar am o un t , as s up p ort edb y Rev eren d Bro w n ’ s t es t i m o n y , i s s u ffi ci en tev i d en ce o f o ffi ci al act io n an dp aym en t

“ d i st i n g ui s h edfro m

s al ary o r o t h er rem

u n erat i on ” fo r 2 0 0 7 . See s ec. 1
. 1 07 -1 (b ), In co m e Tax Reg s . W e can n o tm ak e a s im i l ar fi n d i n g fo r 2 0 0 8 an d2 0 0 9 , as th e p aym en t s b ecam e i rreg u l ar an du n s up p o rt edb y an y ch eckreg i s t er o r n o t at i o n i n t h e CJ C’ s reco rd s . Bu tev en g iv enth e reg u l ari ty o f t h e 2 0 0 7 p aym en t s , th e Bro w n s h av e fai l ed t o s h o w th atth ey

u s edth ei r p ars o n ag e al l o wan ce fo r h o u si n g al o n e an dth atth e al l o wan ce d i dn otex ceedth e s u m o f t h ei r m o rt g ag e p aym en t s an d u ti l it i es . See
s ec. 1 0 7(2 ); Ras m

u ss en v . Co m

m i s s i on er, T.C. M em o . 1 99 4 -3 1 1, 1 9 9 4 W L 3 1 7 4 9 1 , at* 3 -* 4 . Rev eren dBro w n actu al l y t es t ifi edth atthe CJ C p ay s h i s- 2 3 -

[* 2 3 ] p ers o n al u t i l i ty

b i ll s d i rect l y , l ead in g u s t o wo n der wh et h er t h e CJ C al s o p ay s th e Bro wn s ’ m o rt g ag e d i rect l y i n ad di ti o n t o th e $ 1 , 7 50 ch eck(an d i n creas ed
am ou n t s th ereaft er) t h at t h e Bro wn s recei v edtw i ce a m o n t h . Bey on dRev eren d Bro w n ’ s t es t i m o n i al es t im at es o f h i s p h o n e an du ti l it y b il l s , th ere i s n o t hi n g i n th e
reco rdab o u tth e Bro w ns ’ act u al h o u s i n g ex p en s es , an dth erefo re we can ’ tb e s u re t h ath e an dh i s wi fe weren ’ ts p en d i ng th ei r al l owan ce o n fo o d , v acat i o n s , o r ev en t h e cas h n eed s o f h is u n rel at ed b u s i n es s es . Th i s g o es fo r wh at we kn o wwere t h e 2 0 0 7 p ars o n ag e al l owan ce p aym en t s an d wh atwe can o n l y g u es s were t h e 2 0 0 8
an d 2 0 0 9 p aym en t s. W e t h erefo re fi nd i n fav or o f t h e Co m m i s s i o ner o n t h i s i s s ue an d wi l l n o t
s ub t ract t h es e p aym en t s fro m h i s es t i m at e o f t h e Bro wn s ’ t ax ab l e i n co m e as
co m p u t edi n th e b an k -d ep o s i t s an al y s es . 2
. Gi ft s Fro m

th e Co n g reg at i o n By far t h e g reat es tam ou n t s o f t h e d efi ci en ci es at s tak e h ere rel at e n o tt o t h e p ars o n ag e al l o w an ces b u t t o th e am o u n t s o f u nrep o rt ed“ g i ft s ” t h atRev eren d Bro w n recei v ed fro m

m em b ers o f t h e CJ C co n g reg at io n . Letu s s t artwi t h th e b as ics . Sect io n 6 1(a)(1 ) s ay s th atg ro s s i nco m e i n cl u d es “ [c] om

p en s at i o n fo r s erv ices , i n cl u d i n g fees , co m m i s s i on s , fri n g e b en efi t s , an d s im i l ar i t em s .” See al s o Co m m i s s i on er v . Gl en s h aw Gl as s Co ., 3 4 8- 2 4 -

[* 2 4 ] U.S. 4 2 6 , 4 31 (1 9 5 5) (b ro ad l y co n s t ru i n g g ro s s i n co m e as “ u n den i ab l e
acces s i o n s t o weal t h, cl earl y real i zed , an do v er wh i ch th e t ax p ay ers h av e co m p let e d o m i n i on ”). Th at ’ s qui te t h e s pread , b u t Co n g res s en act eds ect i o n 1 0 2 t o l eav e g i ft s o ff th e t ab l e. Sect i o n 1 0 2 (a) ex cl u des fro m g ro s s i n co m e “ t h e v al u e o f p ro p ert y acq u i redb y g i ft ,” b u ts ect i o n 1 02 (c)(1 ) el i m i n at es t h i s ex cl u s i o n fo r “ an y
am ou n ttran s ferred b y o r fo r an em p l o y er t o , o r fo r t h e b en efi to f, an em p l oy ee.” Wh ati s a g i ft ? Acco rd i n g t o t h e Suprem e Co u rt , “ [a] g i fti n t h e s t atu t o ry
s en s e * * * p ro ceed s fro m a ‘ d et ach edan dd i s in t eres tedg en ero s it y ,’ * * * ‘ o u to f affect i o n , res p ect , ad m i rat i on , ch ari t y o r l i ke i m

pu l s es .’ ” Co m

m is s i o n er v . Dub ers tei n , 3 6 3 U.S. 2 7 8 , 2 8 5 (1 9 6 0 ) (fi rs tqu o t i n g Co m m is si o n er v . Lo Bu e, 3 5 1 U.S. 2 4 3 , 2 4 6 (1 9 5 6 ); an dth enquo t i n g Ro b ert s o n v . Un i t edSt at es , 3 4 3 U.S. 7 1 1 , 7 1 4 (1 95 2 )). Reco g n i zi n g t h atth is d efi n it i on m ay n o t b e eas y

fo r a t ri al co u rtt o ap p ly , th e Co u rth el dthatthe m o s tcri t i cal co n si d erat i on i s th e t ran s fero r’ s i n t en t i o n atth e t i m e t h e p aym en twas m ad e. Id . at2 8 5 -8 6
. Bu tth e Co u rt warn ed t h atth e tran s fero r’ s ch aract eri zat i o n o f h i s i n t en t i o n “ i s n o t d et erm i n at i v e”-- i n s t ead , “ t h ere m

u s tb e an o b

ject i v e i n qui ry as t o wh et h er wh ati s cal leda g i ft
am ou n t s t o i ti n real i t y .” Id . at2 8 6
. Th e Sup rem e Co u rt ’ s t es td o es n o tdraw a b ri gh t l i n e, b utcas el aw h el p s u s t o ap p ly o u r “ ex p eri en ce wi t h t h e m ai n s p ri n gs o f h u m an co n du ctt o t h e t o t al i t y o f- 2 5 -

[* 2 5 ] th e fact s .” Id . at2 8 9 . Ina cri m i nal cas e, th e Fi ft h Ci rcu ith el dth atth e fo l l o w i n g jury

i n s t ru ct i on accu rat el y s tat edth e l aw: Th e fed eral i n co m e t ax i s l ev i edo n i nco m e recei v edb y m i n i s t ers . Wh en an i n d i v i du al p ro v id es m i ni s t eri al s erv i ces as h i s t rad e o r b u si n es s , co n t ro l s th e m o n ey h e recei v es i n th atb us i n es s , an d recei v es n o s ep arat e s al ary , th e i n co m e o f t h atb u s in es s i s t ax ab l e t o t h e m i n i s t er. Vo l u n t ary co n tri b u t i o ns , wh en recei v edb y t h e m i n i s t er, are i n co m e t o h i m . Paym en t s m ad e t o a m i n i s t er as co m p en s at i o n fo r h i s s erv i ces al s o co n st i tut e i n co m e t o h i m . If m o n ey i s g i v en t o a m i n i s t er fo r rel i g i ou s p u rp o s es , an y m o ney u s ed i n s t eadfo r t h e p ers on al b en efi to f t h e m i n i s t er b eco m es t ax ab l e i n co m e t o h i m . Un i ted St at es v . Terrel l , 7 5 4 F.2 d1 1 39 , 1 1 4 8 -4 9 (5 t h Ci r. 1 9 8 5 ). W e reco g ni ze t h atTerrel l was a cri m i nal cas e wh ere t h e m i n i s t er rep o rt ed
n o s al ary atal l , wh i ch i s n o tth e s itu at i o n h ere. W e al s o reco g ni ze t h e d i ffi cu l t y i n d et erm i n i n g th e i nt en to f a g reatn u m b er o f co ng reg an ts , es peci al l y wh en we d o n ’ t kn o w th e i den t i ti es o f m an y an dwere u n ab l e t o h ear fro m m o s to f t h em

d i rect l y . See Fel t o n v . Co m

m i s si o ner, T.C. M em o . 2 0 1 8 -1 68 , at* 1 8 . Th i s fo rces u s t o fo cu s o n th e o b

ject i v e ev i den ce t h atTerrel l, Fel t o n , an do t h er cas es h av e fo u n d i m p o rt an t :

• wh et her t h e d o n at i o n s are o b ject i v el y p ro v i d edi n ex ch an ge fo r s erv i ces ;

• wh et her t h e cl eri c (o r o t h er ch u rch au t h o ri t i es ) req u es t edth e p ers o n al d o n at io n s ;- 2 6 -

[* 2 6 ] • wh et her t h e d o n at i o n s were p arto f a ro u t i n i zed , h i g h l y

s t ru ctu redp ro gram , an dg i v enb y i n d i v i du al ch u rch m em

b ers o r t h e co ng reg at i o n as a wh ol e; an d

• wh et her t h e cl eri c recei v es a s ep arat e s al ary fro m t h e ch u rch an dth e am o u n t o f t h ats al ary i n co m p ari s o n t o th e p ers on al d on at i o n s . Fel t o n , at* 2 6
. Do n at i o n s i n Exch a n g e f o r S er vi ces . Acco rd i n g t o th e Fi ft h Ci rcu it , a
co n tri b u t i o n i s a g i ft o n l y i f i ti s “ n o t i n t en d edas a ret u rn o f v al u e o r m ad e b ecau s e o f an y

i nt en tt o rep ay

an ot h er wh ati s h is due, b u t b es t o wedo n l y b ecau s e
o f p er s o n a l a f f ect i o n o r r eg a rd o r

p i t y , o r fro m

g en eral m o t i v es o f p h i l an t h ro p y o r ch ari t y .” Sch al l v . Co m

m i ss io n er, 1 7 4 F.2 d 8 9 3 , 8 9 4 (5 th Ci r. 1 9 49 ) (em p h as i s ad d ed ) (q u o ti n g Bas s v . Hawl ey , 6 2 F.2 d7 21 , 7 2 3 (5 t h Ci r. 1 9 3 3 )) (h o n orari u m g i ftb ecau s e n o fu tu re s erv i ces p ro m i s edo r p ro v i d ed ), rev ’ g 1 1 T.C. 1 1 1 (1 9 4 8 ). Co u rt s are u n l i k el y , h o wev er, t o fi n dco n t ri b u ti o n s t o b e g i ft s wh en t h e
co n greg at i o n m ak es s u ch co nt ri b u t i o n s i n o rd er t o k eep i t s “ s u cces s fu l m i n i s t er” at a “ rel at i vel y

l o w s al ary .” Go o dwi n v . Un it ed St at es , 6 7 F.3 d 1 4 9 , 1 52 (8 t h Ci r. 1 9 9 5 ); s ee Ban k s v . Co m m is s i o n er, T.C. M em o. 1 9 9 1 -6 4 1 , 6 2 T.C.M . (CCH) 1 6 1 1 , 1 6 1 4 (1 99 1 ) (fi n d i n g co n g reg an t s ’ s peci al d o n at i o n s weren ’ tg i ft s s i n ce t h ey were g i v eno u to f a d es i re t o reward th e p as t o r fo r h er s erv i ces an da h op e t h at
s h e’ d co n t i n ue as th ei r p as t o r). See g en eral l y W al l ace v . Co m

m i s s i o n er, 2 1 9 F.2 d- 2 7 -

[* 2 7 ] 8 5 5 , 8 57 (5 t h Ci r. 1 9 5 5 ) (“ If s erv i ces h av e b een p erfo rm edb y th e reci p i en t s, i t m ay wel l b e s ai dth e p res u m

p t i o n i s th atth e p aym en t i s fo r t h e s erv i ces an dn o t a g i ft ”). Th e Bro wn s cl ai m

th atth e g i ft s th ey

recei v ed were n o t fo r s erv i ces ren d ered
o r fo r fu tu re s erv i ces h o p edfo r. Bu twe fi n d n o d ifferen ce i n t he o b ject i v e
m ark ers o f t he d o n ors ’ i nt en t i o n s h ere fro m th o s e i n o t h er cas es wh ere m em b ers o f
a co n greg at i on g i v e m on ey t o th ei r cu rren tp as t o r. Tal i s h a Ben n et t , th e CJ C’ s b o o kk eep er du ri n g al l th e y ears ati s s u e, d es cri b edth e ch u rch ’ s en v el o p e s y s t em
an d t o ldu s th atth e s peci al g i ftl i n e o n th e en v el op es “ are ju s ti f s o m eo n e d eci d es t h ey wan tt o ju s tg i v e a g i ftt o Dr. Bro wn fo r wh at ever r ea s o n .” (Em

p h as i s ad d ed ). Sh e co n t i n u edo n t o s p eci fy th at “ [s ] o m e p eo p l e wo u l d l i ke t o g i v e fo r wh at ev er th ey ’ re s o wi n g t o ward s ,” s u ch as “ fo r t h e h eal i n g o f a fam i ly m em b er”
o r s o m e o t h er s p eci al i n ten t i o n. Th e m em o l i n es o f t he m an y , m an y ch eck s i n th e
reco rdfro m

co n g reg an t s (al l h ears ay , o f co u rs e, b u tu no b ject edt o ) i ncl u d e a g reat
n u m b er o f p h ras es s u ch as “ l o ve s eed ,” “ fi rs tfru i t s ,” an d“p as t o r’ s o fferi n g.” So m e are m o re l earn ed , i n cl ud in g a ci t e t o ch ap t er 4 o f St
. Pau l ’ s l et t er t o th e Ph i l i pp i an s , 1 4 an do b vi o u s l y h eart fel t --“ fai t h wal k er,” “ t h an ky o u fo r ev eryt h i n g ,”

1 4 “ No tb ecau se I d es i re i ta g i ft : b utI d es i re a fru i t t h at m ay ab o un dt o y o u r acco u n t . Bu t I h av e al l , an dab o u n d: I am fu l l
. ” Ph il . 4 : 1 7 -1 8
.- 2 8 -

[* 2 8 ] an d “ t h e d ream

m ak er!” Ab o v e an db ey o n d t h e co n t ri b u t i o n s m ad e i n th e fo rm o f p ers on al ch eck s are t h e CJ C’ s ch eck s , wh i ch ag g reg at e t h e co n g reg an t s ’
co n tri b u t i o n s. W e d o n o td o ub t t h atth e CJ C fai t h fu l m ad e t h es e o fferi n g s t o Rev eren d Bro w n i n s o m e co n s i d erab l e p artfo r t h e g races th atth ey h av e recei v edfo r t h ei r fai t h fu l n es s . Int ax l aw s u ch “ i n t an g i b l e rel ig i ou s b en efi t s ” d o n ’ tco u n tas i t em s
o f v al u e recei v ed b y

a d o no r i n ex ch an g e fo r h i s d on at i o n s . See s ec. 1 7 0 (f)(8 )(B)(i ii ); Fel to n , at* 29 . Bu ti n th e p ro fan e wo rl do f t ax l aw, a p aym en t
can s t i ll b e fo r s erv ices ren d ered ev en i f t he p ay o r d o es n o trecei v e an eco n o m i c b en efi tfro m

i t . Dub ers t ei n , 3 6 3 U.S. at2 8 5 . As we s ai d i n Fel t on , we * * * th in kthatthe ex h o rt at i o n b y th e Suprem e Co u rti n Dub ers t ei n t o fo cu s o n o b ject i v e ev i d en ce o f a d o no r’ s i n ten tm ean s we h av e t o as kwh et h er t h e d o n at i o n s are o f t h e m ag ni tu d e an dty p e t h atwo u l dm ak e u s d o ubtth atwh ati s cal l eda g i ft am ou n t s t o o n e i n real i ty
. Fel t o n , at* 2 9 (ci t i n g Dub ers t ei n , 3 6 3 U.S. at2 86 ). Rev eren dBro wn m ay

n o th av e ex p li ci tl y

ag reed t o p ro v i d e fu ture s erv i ces i n ex ch an g e fo r t h es e co n tri b ut i o n s , b u t we fi ndth at t h ey were m ad e b y
co n greg an ts wh o m ean t t o k eep Rev eren dBro wn p reach in g wh ere h e i s . He p ro v id es th e “ fru i t”, o r “ i n tan g i b l e rel i gi o u s b en efi t s ,” an dth e co n g reg an t s ’

“ s eed s ”, o r co n t ri b u t i o n s, are i n s o m e s ecu l ar s en s e i n ex ch an g e fo r t hem
.- 2 9 -

[* 2 9 ] Th i s fact o r t i l ts t o w ard s i n co m e. Do n at i o n Req u es t

s . A g i ftcan b e m ad e o n l y o u to f “ p ers on al affect i o n o r reg ardo r p i t y , o r fro m

g en eral m o t i ves o f p h i l an t h ro p y o r ch ari t y .” Sch al l , 1 7 4 F.2 dat 8 94 (quo t i n g Hawl ey , 6 2 F.2 dat7 2 3). In Go o d w i n an d Ban k s, t h e co u rt s h el dth atev i d en ce o f reg u l ar req u es ts fo r d o n at i o n s t o a p as t o r s upp o rt s a fi n d i n g t h atan y d o n at i o n s m ad e i n res p o n s e are i n co m e an dn o tg i ft s . Go o d wi n , 6 7 F.3 d at1 5 0 , 1 5 2 -5 3 (as s o ci at e p as t o r an n o u n ced“ s p eci al o ccas i o n ” d ay s wh ere t h o s e wh o wi s h edt o co n tri b u te a s p eci al o ccas i on g i ftt o th e p as to r co u l dd o s o ); Ban ks , 6 2 T.C.M . at 1 6 1 4 (t h e am o u n tp l ed g edb y i n d i vi du al m em

b ers was d et erm i n edat
o p en m eet in g s atth e ch u rch ). An di n Fel t o n , at* 30 -* 3 1 , we reas o n ed t h atth e ch u rch was n o t req u es t i n g d o n at i o n s b ecau s e m em b ers h adt o s p eci fi cal l y

as kfo r a
s p eci al g i ften v el o p e--an en v el o p e t hatwas d i s t i n ctfro m th e o nes u s ed fo r
o fferi n gs an d t i t h es . Rev eren dBro wn t es t i fi edth ath e “ d o [es n ’ t ] t ry t o m an i p ul at e an y

bo d y ,” o r

“ co erce an y o n e” i n to g i vi ng a g i ft , an dth at “ it ’ s g o tt o b e s o l el y o n th ei r h eart
* * * n o ts om eo n e s o rto f g u i d i n g an ds t eeri n g th em i n th atd i rect i o n .” W e
co m p l et el y b el i ev e t h i s t es t i m o n y , b u t we d o fi n dth ere was an ex p ect at i o n atth e CJ C t hatco n g reg an t s s h ou l ds up po rta m i n i s t er wh o “p reach [es ] i t,” “ t each [es ] i t , ” “b el i ev e[s ] i t,” an d“ l i v e[s ] i t .” W e al so n o te t h atth e CJ C h adatl eas ttwo- 3 0 -

[* 3 0 ] m ajo r d ay s fo r g i v i ng t o Rev eren dBro wn each y ear: th e Rev eren d ’ s b i rt h day an dan o t h er t oward s t h e en do f No v em b er--“ Bi s h o p ’ s Day .” 1 5 Th e
n u m b er o f ch eck s recei vedo n t h es e d ay s were a d i s p ro p ort i on at el y l arg e s hare o f al l th o se g iv en t o Rev eren dBro wn each y ear, l ead i n g u s t o fi n dth at t hes e s p eci al g i ft -g i v i n g d ay s were b ro ad cas tt o an dwel l kn o wn b y th e co ng reg an t s. Th at
m ak es t h i s cas e s i m i lar t o Ban k s an d Go o d wi n , wh ere t h e co u rt s al s o fo u n dth at t h ere were d es i g n at eds p eci al g i v i n g d ay s . Wh at ’ s m o re, th e CJ C o ffered o n l y o n e k i n do f en v el o p e fo r al l ty p es o f co n t ri b u t i o ns , an dh ada way fo r d o n o rs t o s p eci fy wh atty p e o f co n t ri bu t i o n th ey wi s h edt o m ak e. 1 6 Th i s s i n g le-en v el op e s y s t em , co upl ed wi t h atl eas ttw o m ai n d ay s o f g i vi n g , m ak es u s fi ndth at t h e CJ C creat ed
an ex pect at i on t o m ak e co n t ri b u t i o n s n o tp res en tt o th e s am e d eg ree i n Fel t o n . Th i s fact o r t i l ts t o w ard s i n co m e. Ro u t i n i z ed , Hi gh l y Str u ct u r ed

Pr o gr a m . Ev en i f co n g reg an t s cl ai m t o h av e
m ad e co n t ri b ut i o n s “ ou to f l o v e, ad m i rat i o n , an d res pect , n o to u t o f a s en s e o f
o b l i g at i o n o r fear” t h atth e p as t o r wo u l d l eav e, t hey are n o t g i ft s as a m at t er o f t ax

1 5 Oth er s p i kes i n g i v i n g were o n Fat h er’ s Day an datCh ri s tm as t im e. 1 6 As p rev i o u s ly

d i s cu ss ed , th e en vel o p e al l o wedco n greg an t s t o s p l i tth ei r d o n at i o n s am o n g fo u r cat eg o ri es --“ s p eci al g i ft ,” “ t it h e,” “ o fferi n g ,” an d“ b u i l d i n g fu n d
. ” W e t hi n kRev eren d Bro wn b en efi tedb y h av i n g t h e “ s p eci al g i ft ” d es i g n at i o n o n al l en vel o p es . Fo r ex am p le, s o m eo n e wan t i ng t o d on at e $ 1 0 0 t o t h e ch u rch m ay

d eci d e t o l i s t a p o rt i o n o f i tfo r t he Rev eren d as a s p eci al g i ft
.- 3 1 -

[* 3 1 ] l aw i f m ad e an d “ g at hered b y co n g reg at i o n l ead ers i n a ro u t i n i zed , h i g h l y
s t ru ctu redp ro gram , ” an dm ad e o n b eh al f o f t he wh o l e co n g reg at i o n. Go o d wi n , 6 7 F.3 dat 1 52 (rev i ewi ng th e co n t ri b ut i o n s o f a co n g reg at i o n t h ath ad a reg u l ar p ro cedure fo r m ak in g “ s p eci al o ccas i o n g i ft s ” o n cert ai n d ay s o f t h e y ear). In s l i g h t co n tras tt o th e p at t ern o f g i v i n g i n Go o dwi n an d Ban k s , th e d o n at i o n s fro m

co n g reg an t s h ere were m ad e t h ro u g h o u t t h e y ear as wel l as o n cert ai n “ s p eci al d ay s ” o f each y ear. See Fel t o n , at* 3 1 (ci t i n g Go o d wi n , 6 7 F.3 dat 1 5 0 , an dBan k s , 6 2 T.C.M . (CCH) at 1 6 12 ). Rev eren dBro w n , M rs . Bro w n , an d Tal i sh a Ben n et tal l t es t i fi edth atco ng reg an t s g i v e g i ft s t o th e Rev eren do n an y d ay
an d atan y

t i m e--n o tju s to n Su n d ay s duri n g ch u rch . Fo r ex am p l e, Rev eren d Bro w n t es t i fi edthatco n greg an t s o ccas i o nal l y h an d h i m

g i ft s wh en h e’ s “ wal k i n g i n the b u i l d i n g ” o r ju s t“ o u ti n a res t au ran t .” Th e d at es o f t h e ch eck s i n t h e reco rd d o s h o w g i v i ng th ro u g h o u t t h e y ear, b u tal s o s h o w a h i g h rat e o f g i v i n g o n th e
s p eci al g i v i n g d ay s , i n cl u d i n g Bi s h o p ’ s Day an d t h e Rev eren d’ s b i rt h d ay . Th e
co m p arat i v el y l o w er am o un to f an dp art i ci p at i o n i n y ear-ro u ndg i vi n g therefo re d o es no tal t er o u r v iew t h at t h e CJ C en co urag edg i v i n g o n reg u l arl y s ch edu l ed
o ccas i o n s . Th ere’ s o t h er ev i d en ce t h atthe CJ C h ada ro ut i n i zedan dh i g h l y s t ru ctu red
s y s t em . It s b o o kk eep in g s y s tem s m o o t h l y ag g reg at edco n t ri b u t i o n s m ad e t o th e- 3 2 -

[* 3 2 ] CJ C b u ti n t en d edfo r Rev eren dBro wn p ers o nal l y : Th e d o n at i o ns were
o rg an i zedb y

fo rm , wi th cred i t -cardd o nat i on s an dch eck s wri t t en t o th e CJ C fo r t h e Rev eren dp o o l ed , t o t al ed , an d d i s t ri b u t edt o h i m i n a s i n gl e ch eckfro m

th e CJ C. Al l o t h er d o n at i on s m ad e o u tt o h i m d irect l y were b u nd l edan d p as s edal o n g t o h i m . Do n at io n s m ad e th ro u g h th e en vel o p e s y s tem are t hu s o b

ject i v el y d i fferen t an di n m

u ch g reat er q u an t i t y

th an th e o ccas io n al “ t wen t y d o l l ar g i ft
s p o n tan eo u s l y

g i v en b y a ch u rch m em

b er.” See Go o d wi n , 6 7 F.3 d at1 5 2
. Th i s fact o r t i l ts t o w ard s i n co m e. Ra t i o o f Ch u rch S

a l a r y t o Per s o n a l Do n a t io n s . Arri v i n g ato u r fi n al fact o r, we h av e t o co m

p are, as b es twe can , Rev eren dBro wn ’ s s al ary fro m th e CJ C i t s el f t o the am o u n t s o f d o n at io ns recei v edfro m i n d i v i du al co n g reg an t s :
2 0 0 7 2 0 0 8 2 00 9 Rev eren dBro wn ’ s Sch edul e C--M in i s t er m i s c. i n co m e (s al ary ) $ 1 0 5 ,0 0 0 $ 1 0 7,7 5 0 $ 1 2 0 ,0 0 0 M rs . Bro wn ’ s CJ C s al ary 2 5 ,6 0 0 2 5 ,9 0 5 2 6,0 4 4 To t al rep o rt edCJ C i nco m e 1 3 0 ,6 0 0 1 3 3,6 5 5 1 4 6 ,0 4 4 BDA: Un d errep o rt ed CJ C d ep os i t s , i ncl u d i n g p ars on ag e p aym en t s 1 5 4 ,3 6 6 2 0 5,5 2 3 1 1 8 ,5 8 9- 3 3 -

[* 33 ] Co n t ri b u ti on s recei v edo n Bi s h o p’ s Day an db i rt h d ay 1 3 ,6 50 2 6 ,1 3 6 2 7,3 9 0 Po s s i b l e CJ C p ars on ag e p aym en t s 1 4 2 ,0 0 0 3 8,0 0 0 3 2,0 0 0

1 Fo r 2 00 8 an d2 0 0 9 , we l etd o wn o u r n eti n t o th e s ea o f m em o -l es s ch eck s t o fi s h o u tth o s e t h atco ul d p o t en t i al l y b e co n s i d ered p ars o n ag e p aym en ts . Th e t o t al s l i s t edfo r t h os e y ears rep res en to u r b es t es ti m at e. Th e reco rdi s fu ll o f ch eck s fro m co n greg an t s an dthe CJ C g i v i n g t h o us an d s an d t h o u s an ds o f d o ll ars i n p as t o ral o fferi n g s each y ear, n o tt o m en t i o n t h e o t h er h eft y ch eck s fro m

th e CJ C fo r p ars o n ag e, “ m o rt gag e”, “ v eh i cl e”, “ v acat i on ex p en s es ,”
an d “ m ed i cal ” ex p en s es , am o n g o t h er th i n g s . An dth i s d o es n ’ t ev en i n cl u d e t h e t h o u s an ds o f d o ll ars i n cas h d ep o s i t s fo r wh i ch we can n o ti d en t i fy a s ou rce. W e h av e al s o fo u n dm

u l t i p l e ch eck s fro m

th e CJ C wi t h “ DM 99 ” i n th e m em o --t h atwe
as s u m e m ean s Dream

M ak ers 9 9 --l eav i n g u s wi t h t h e i m p res s i o n th at t h e CJ C was al s o p ay i ng s o m e o f th e Rev eren d ’ s m o ti v at i o n al s p eak i n g ex p en s es . W e s t ru g g l e t o s ee h o w s uch l arg e s u m s o f m o n ey can b e g i ft s , es p eci al l y

g i v eno u r fi nd i n g s o n t h e o t h er t h ree fact ors . InFel t o n , at* 3 4 , we fo u n d t h at“ [w] h en co m p arat i v el y

s o
m u ch m o n ey

fl o ws t o a p ers o n fro m

p eo p le fo r wh o m

h e p ro v i des s erv i ces (ev en i n t an g i b l e o n es ), an dt o wh o m h e ex p ect s t o p ro v id e s erv i ces i n t h e fu tu re, we fi n d i t to b e i n co m e an d n o t g i ft s .” It ’ s v ery m u ch th e s am e h ere, an d s o we fi n dth at- 3 4 -

[* 3 4 ] th e co n t ri bu t i o n s fro m th e CJ C’ s co n g reg an t s are t ax ab l e i n co m e t o t h e Bro w n s . W e can n o w tu rn t o t h e d edu ct i o n s id e o f t h e cas e. II. A Tas t e o f Bu ffal o an dLo s s Li m i t at i o n s No b od y d oub t s th atth e Bro wn s l o s tm o n ey o n th ei r i n ves t m en ti n ATOB. Sect i o n s 1 6 2 (a) an d2 1 2 (1 ) g en eral l y al l o w t ax pay ers t o d edu ctth ei r b u s i n es s an d i n v es t m en tex p en s es , b u ts ect io n 4 6 9 l i m i t s tho s e d edu ct io n s wh en th ey ari s e fro m

“ p as s i v e act i v i t i es .” A “p as s i ve act iv i t y ” i s “ an y act i v i ty * * * wh i ch i n v o lv es th e
co n du ct o f an y

trad e o r b u s i n es s , an d* * * i n wh i ch th e t ax p ay er d o es n o t
m at eri al l y

p art i ci p at e.” Sec. 4 6 9 (c)(1 ). Wh ena m arri edco up l e g o es i n t o a b u s i n es s t o g et h er, we l o o k atth ei r co m b i nedact i v i t y

t o d eci d e wh et her i t am o u n t s t o m at eri al p art i ci p at io n . Id . s ub s ec. (h )(5 ). Bu twh at i s “ m at eri al p art i ci p at i o n? ” Th e Co d e t el l s u s th at“ m at eri al p art i ci p at i o n ” m ean s b ei n g “ i n v o l v edi n th e o p erat i o ns o f t h e act i v i t y ” o n a reg u l ar, co nt i n u o u s , an ds ubs t an t i al b as i s , i d. p ara. (1 ), an dth e reg u lat i o n s l ay o u t
s ev en --an do n l y s ev en --way s a t ax p ay er can p ro v e th at , s ee s ec. 1 .4 6 9 -9 (b )(5 ), In co m e Tax Reg s .; s ec. 1 .4 69 -5 T(a), Tem p oraryIn co m e Tax Reg s ., 5 3 Fed . Reg
. 5 7 2 5 -2 6 (Feb . 2 5 , 1 9 8 8 ). Th e Bro wn s cl ai m th ey s at i s fy

fo u r o f t h es e s ev en way s :- 3 5 -

[* 3 5 ] • “ [t ] h e i n d iv i du al p art i ci p at es i n t h e act i v i t y fo r m o re t h an 5 00 h ou rs du ri n g s u ch y ear; ”

• “ [t ] h e act i v i t y i s a s i g n ifi can tp art ici p at i o n act i v i t y (wi t h i n t he m ean i n g o f p arag rap h (c) o f t h i s s ect io n ) fo r t h e t ax ab l e y ear, an dth e i n d i v idu al ’ s ag g reg at e p art i ci p at i on i n al l s i g ni fi can t p art i ci pat i o n act i v i t i es du ri n g s u ch y ear ex ceed s 5 0 0 h o u rs ; ”

• “ [t ] h e i n d iv i du al p art i ci p at es i n t h e act i v i t y fo r m o re t h an 1 00 h ou rs du ri n g t h e t ax ab l e y ear, an d s u ch i nd i v i du al ’ s p art i ci pat i o n i n th e act i v i t y fo r t h e t ax ab l e y ear i s n o t l es s t h an t h e p art i ci p at i o n i n th e act iv i t y o f an y o t h er i n d i vi du al (i n cl u d i n g i n d i v i du al s wh o are n oto wn ers o f i n teres t s i n th e act i v i t y ) fo r s u ch y ear; ” o r

• “ [b ] as edo n al l o f t h e fact s an d ci rcu m st an ces (t ak i n g i n t o acco u n tth e ru l es i n p arag rap h (b ) o f t h i s s ect i o n), t h e i n d iv i du al p art i ci pat es i n th e act i v i t y o n a reg u l ar, co n t i n u o u s , an ds ub s t an t i al b as i s du ri n g s u ch y ear.” Sec. 1 .4 6 9 -5 T(a)(1 ), (3 ), (4 ), (7 ), Tem p o rary In co m e Tax Reg s ., s up ra. Th e Co m

m i s s i o n er t h i n k s th e Bro w n s h av e m etn o n e o f t h es e t es ts
. Th e d i ffi cu l t y th e Bro wn s face h ere i s th atm os to f t hes e t es t s are q u an t i t at i v e--t h ey d em an dp ro o f o f t h e n u m b er o f h o u rs th ata p ers o n s pen d s o n an act i v i ty . Th e Bro w n s ru n i n t o thei r fi rs tp ro bl em wi th th ei r p ro du ct i on o f t wo d i fferen tl o g s fo r 2 0 0 7 : th e fi rs t was p ro v i d edt o RA Frei t as du ri n g th e au d i tan ds h ows th atth ey
s p en t a t o t al o f 5 0 2 h ou rs p art i ci p at in g i n ATOB; th e s eco ndwas p ro du cedaft er t h e au d i tan d s ho ws 7 1 4 h o u rs . Lo g s th at co n fl i ctu n d erm i n e each o t h er’ s- 3 6 -

[* 3 6 ] cred i b il i t y . Bu ttwo i s b et t er th an n o ne, an d fo r y ear 2 0 0 8 th e Bro wn s p ro duced n o p art i ci pat i o n l o g s atal l
. Th e reg u l at i o n s h el p u s g au g e t h e cred i b i l i t y o f t h e Bro wn s ’ l o g s an dan y
o t h er ev i d en ce t hey

o ffered t o p ro v e t h ei r m at eri al p art i ci pat i o n . Th e reg u l at i o n s
s ay that“ [c] o n t em

p o ran eo us d ai l y

t i m e rep o rt s , l o g s , o r s i m i l ar d ocu m en t s are n o t req u i redi f t h e ex t en t o f s u ch p art i ci p at io n m ay b e es t ab l i s hedb y

o t her reas o n ab l e
m ean s . ” Id . p ara. (f)(4 ), 5 3 Fed . Reg . 5 7 2 7 . An d“ [r] eas o n ab l e m ean s * * * m ay i n cl u d e b u tare n o tl i m i t ed to th e i d en t i fi cat io n o f s erv i ces p erfo rm edo v er a p eri o d
o f t i m e an dth e ap p ro x i m at e num b er o f h o u rs s p en tp erfo rm i n g s u ch s erv i ces
* * * b as edo n ap po i n t m en tb o o k s , cal en d ars , o r n arrat i v e s u m m ari es .” Id
. W e’ v e h el dt i m e an dt im e ag ai n , h owev er, t h ata ret ro s p ect i v e “ b al l p ark g u es st i m at e” i s n ’ tg o o d en o u g h, s ee, e.g . , M o s s v . Co m m i s s i on er, 1 3 5 T.C. 3 6 5 , 3 6 9 (2 01 0 ), an d“ we d on ’ t hav e t o accep tu n veri fi ed , u n do cu m en t ed t es ti m o n y ab o uth o w a t ax p ay er s p en th er t i m e,” Es t at e o f Ram i rez v . Co m m i s s i o n er, T.C. M em o. 2 0 1 8 -1 9 6 , at * 1 7 ; s ee al s o Ro b i s o n v . Co m m is si o n er, T.C. M em o . 2 0 1 8
- 8 8 , at* 2 6 (ci t i n g Es t at e o f St an g el an dv . Co m m i ss i o ner, T.C. M em o. 2 0 1 0 -1 8 5 , Sh aw v . Co m

m i s s i o n er, T.C. M em o . 2 0 0 2 -3 5, an dSch ei ner v . Co m m i s s io n er, T.C. M em o. 1 9 9 6 -5 5 4 ). Th i s i s a p ro b l em fo r t h e Bro wn s , b ecau s e t h ey o ffered n o d o cu m en t ary

ev i d en ce t o p ro v e t h ei r t i m e s pen to n ATOB i n 2 0 0 8 an db ecau s e- 3 7 -

[* 3 7 ] wh atth ey

d i do ffer fo r 2 00 7 l ack s cred i b il i ty . St i l l , wi th thes e g en eral t h o u g h t s i n m i n d , l etu s l o o k ateach t es t
. A. Part i ci p at io n i n Act i v i t y Ex ceed s 5 0 0 Ho u rs Th i s t es t i s eas y t o u n d ers t an d , b utl es s eas y t o m eet . Th e Bro wn s wo u l d h av e t o es t ab l i s h th att og et h er th ey s p en t m o re t h an5 0 0 h o urs o n ATOB. See s ec. 1 .4 69 -5 T(a)(1 ), Tem

po rary In co m e Tax Reg s . , s up ra. Th ei r b es tev i d en ce fo r 2 0 0 7 i s t h e l o g s th ey ’ v e p ro v i d ed ; an d fo r 2 0 0 8 , al l we h av e i s t es t i m o n y . In ad d it i o n t o th ei r co n fl i ct i n g t o tal h o urs , the Co m m i ss i o n er co rrect ly

p o i n t s o u tth at t h ey l is to n l y th e h o u rs s p en to n ATOB an dfai l t o l i s tthe s erv i ces p erfo rm ed du ri n g th o s e h o u rs . W i t h o utm o re s p eci fi cs , th es e l o g s are “ b al l p ark g u es st i m at es ” t h atwe wo n ’ taccep t
. Th i s b y i t s el f m i g h tn o tb e fat al i f we h adfo u ndth e Harri s es ’ t es ti m o n y o n t h e Bro wn s ’ wo rkh o u rs m o re co rro b o rat i n g . Wh enas k edwh et h er s h e s aw t h e Bro w n s ag ai n aft er ATOB o pen edi t s d o o rs , M s . Harri s an swered th atthey cam e i n atl eas tth ree t i m es a week . M r. Harri s s ai dth at , al t h o ug h h e d i dn o tk eep track
o f t h e h o u rs th e Bro w n s s p en t atATOB, h i s b es tg u es s was th atRev eren dan d M rs . Bro wn s p en taro u n d3 0 an d2 0 h o u rs a week , res p ect i v el y , o n ATOB fo r a
co m b i nedt o t al o f 2 ,6 0 0 h o urs a y ear--an am o u n to f t im e we fi n d i m p l au s i b l e g i v en th e Bro w n s ’ fu l l-t i m e jo bs atth e CJ C, an d g i v en ev ery th i n g el se t h atth e- 3 8 -

[* 3 8 ] Bro wn s d o . So wh i l e we t h i n ki t ’ s cl ear t h atth e Bro wn s d ev ot eda g o o d
am ou n to f t i m e t o ATOB, th e ev i d en ce t h ey ’ v e p ro v i d edi s n ’ ten o u g h t o s at i s fy t h i s s t ri cth o u rs -b as ed t es t. B. Part i ci p at io n Ex ceed s 1 0 0 Ho u rs an dAg g reg at e o f Al l
“ Si g ni fi can t -Part i ci p at i o n ” Act i v i t i es Ex ceed s 5 00 Ho u rs Th i s t es t req u ires u s t o d efi n e a “ s i g n i fi can t p art i ci p at i o n act i v i t y .” Th e reg u l at i o n d efi nes i tas an act i v i t y i n wh i ch a t ax p ay er p art i ci p at es fo r m o re th an 1 0 0 h o u rs du ri n g t h e y ear, s ec. 1 .4 6 9-5 T(c)(1 )(i ), (2 ), Tem p o raryIn co m e Tax Reg s., 5 3 Fed . Reg . 5 7 2 6 (Feb . 2 5 , 1 9 8 8 ), b u td o es n otm at eri al l y p art i ci pat e i n , i d . s ub p ara. (1 )(i i ). Tax p ay ers th erefo re m eetth i s d efi n i ti o n i f t hey s pen dju s t
en o ug h (o v er 1 0 0 h o u rs ) b u tn ott o o m u ch (l es s th an5 0 0 h o urs ) t im e p art i ci p at i n g i n an act i v it y . Th i s t es t i s a way t o ag g reg at e p art i ci p at i on i n act i v i t i es th atk eep t ax p ay ers b u s y

b u tn o tt oo b us y . Fo r t h e Bro wn s t o m eetth i s t es t , th ey ’ dh av e t o ex ceed 1 0 0 h o u rs p art i ci p at i n g i n ATOB an d al s o p ro ve t h atth ey s pen to ver 5 00 h o u rs p art i ci p at i n g i n al l th ei r s ig n i fi can t-p art i ci pat i o n act i v it i es . See i d . p ara. (a)(4 ). Si g n i fi can t p art i ci p at i o n act i v i t i es d o n o ti ncl u de t ho s e th at ex ceed 5 0 0 h o u rs o f p art i ci p at i o n , an d t h e Bro wn s ’ wo rkatth e CJ C ex ceed s t h i s an ds o i s o u t . Th is l eav es u s wi t h Rev eren dBro wn ’ s m o t i v at io n al -s p eak i n g an do t h er n o n-CJ C act i v it i es . W e kn o w- 3 9 -

[* 3 9 ] Rev eren d Bro wn s t ay edfai rl y b u sy wi th t hes e, b u t t h ere’ s n o th i n g i n th e
reco rdt o es t ab l i sh th e h o u rs t h atth e Bro wn s s p en t o n each o n e. Th e Bro w n s t h erefo re fai l t h i s t es t
. C. Part i ci p at io n Ex ceed s 1 0 0 Ho u rs an dAl l Others ’ Part i ci p at i o n Fo r t h e Bro wn s t o es tab l i s h m at eri al p art i ci p at i o n u n der t h i s t es t , th ey ’ d h av e t o s h o w th at t h ey

s p en t m o re t i m e wo rk i n g fo r ATOB th an d idM r. an dM rs . Harri s . See i d . s ubp ara. (3 ). Th ere i s n o i nt erp ret at i o n o f t h e reco rdth atwo u l d
s up p orts u ch a fi n di n g . Th e Harri s es o v ers aw t h e res t au ran t ’ s d ai l y o p erat i o n s as t h ei r o nl y fu l l -t i m e jo b s . Th ey

cred i b l y t es t i fi edthatth ey

s p en taro u nd1 2 h o u rs a d ay , 6 d ay s a weekatATOB co o k i n g , cl ean i n g , h i ri n g , an ds uperv i si n g s t aff. Th e Bro w n s co u l dh ard ly

s p en dm o re t im e o n ATOB i f t h ey l iv edth ere, wh i ch wo u l d b e i m p o s s i b l e g i v en th ei r careers atth e CJ C. Th ey d o n o tm eetth i s t es t
. D. Reg u l ar, Co n t in uo u s , an d Subs t an ti al Part i ci p at i o n Th ere i s , h o wev er, o n e l as tt es t --wh et h er, b as edo n al l th e fact s an d ci rcu m s t an ces , th e Bro wn s p art i ci p at edi n ATOB o n a “ reg u lar, co n ti n uo u s , an d
s ub s t an t i al b as i s ” du ri n g each y ear at i s s u e. See i d
. s ub p ara. (7 ). Th ey wo u l ds t i l l h av e t o s h o w p art i ci p at i o n ex ceed i n g 1 00 h o u rs , i d . p ara. (b )(2 )(i i i ), an dth ey can ’ t i n cl u d e an y

“ s erv ices p erfo rm edi n t h e m an ag em en to f” ATOB, i d. s ub d i v . (i i ). Keep i n g i n m i n dth atth e Bro wn s g ett o p o o l th ei r p art i ci p at i o n , s ee s ec. 4 6 9 (h )(5 ),- 4 0 -

[* 4 0 ] we fi n db as edo n th ei r t es t i m on y , an dth at o f t h e Harri ses , thatth ey ex ceed t h e 1 0 0-h o u r t h res h o l d
. W e al s o fi n d t h at , ev en g i v en th ei r o ccas i o nal s h are o f m an ag em en t -rel at ed p art i ci p at i o n , th e Bro wn s h av e m etwh atth i s t es treq u i res . Iti s o b vi o u s t o u s th at t h e Harri ses m an ag ed A T OB--t h ey ran the res t au ran t ’ s d ay -t o-d ay o p erat i o n s . See W ad e v . Co m

m i s s i o n er, T.C. M em o . 2 0 1 4 -1 6 9 , at* 7-* 8 (d es cri b in g m an ag em en t du t i es as ru n n i n g “ day -t o -d ay op erat i o ns ”). Th is m ean s th atth e Bro wn s ’ p art i ci p at i o n i n cl ud edo nl y a d e mi n i mis am o u n to f m an ag em en t . Bu tth e Bro wn s fo cu s ed on th e i m

p ort an tch o res o f h an d l i n g t h e fi n an ces , p ro du ctd ev el o p m en t , an d cu s t o m er ret en t i o n . See M o n t g o m ery v . Co m m i s s i o n er, T.C. M em o . 2 0 1 3
- 1 5 1 , at * 9 -* 11 (h an d l i ng al l o ffi ce fu n ct i on s , m an ag i n g p ayro l l, p rep ari n g o ffi ci al d o cu m en t s , an dat t en d in g b u si n es s m eet i n gs i s reg u l ar, co n t i n u o u s , an ds ubs t an t i al p art i ci p at i o n ). It seem s t o u s th atth e reco rdas a wh o le t el l s a s to ry o f t wo co up l es wh o d eci d ed to o p en a res t au ran t , wi t h o n e p ai r ab l e t o m an th e p o s tan dp ro v i d e t h e h an ds -o n ex p eri en ce, an dth e o t h er ab l e t o p ro v i de t he b u s in es s kno w-h ow an d fu n d s. J us tb ecau s e th e Bro wn s weren ’ tru n n i n g th e d ay -t o -d ay o p erat i o n s d o es n ’ t
m ean th ey

weren ’ tp l ay i n g a m ajo r ro l e i n ATOB’ s o perat io n . Th ey s pen t a l o to f t i m e wo rk i n g t og et h er o n ATOB’ s m en u s , ad v ert i s i n g, d eco r, an dwh at ev er el s e- 4 1 -

[* 4 1 ] n eed edt o b e d o n e. Ont op o f t h i s , Rev eren dBro wn h an d l edm o s to f t h e fi nan ces an dwro te m o s to f t he ch eck s fo r s upp l i es an d v en d o rs , ren t , an du t i l i t i es . Th e Harri s es g av e h i m

th e d ai ly recei pt s an dcas h , an dh e wo u ldd o the b o ok s . He al s o d i dth e p ayro l l fo r ATOB. W e d o n ’ tb el i ev e an y t es t i m o n y

th at t h e Bro wn s
s p en t m an y , m an y

h u n d red s o r ev en th o u san d s o f h ou rs d o i n g thi s , b u twe d o fi n d i t m o re l i k el y

th ann o tth atth ey

s p en t m o re t h an 1 0 0 h o u rs co m b i n edo n t h es e ch o res an dwere i n t eg ral t o ATOB’ s o p erat i o n . Th i s l et s u s fi n dthatth e Bro wn s
m at eri al l y

p art i ci p at ed i n ATOB fo r b o t h 2 0 0 7 an d2 0 0 8
. 1 7 III. Sch edu l e C Su b s t an ti at i o n Th e Co m m is s i o n er al l o wedth e Bro wn s t o d eductm os to f t h ei r cl ai m edcar
ex p en s es fo r each y ear at i ss ue. Th e Co m m i s s io n er s ay s th ey

s h o u l d n’ tg et
an yt h i n g m o re b ecau s e t h ey fai l edt o m eetth e s t ri cts ubs t an ti at io n req u i rem en t s o f

1 7 W e al s o n o t e th atn ei th er p art y , atan y p o i n ti n th e p ro ceed i n gs , rai s ed an y p ro b lem wi t h the Bro wn s ’ d edu ct i n g ex pen s es fo r a res t au ran tth ath ad n ’ t o p en ed y et
. Sect i o n 1 9 5 g en eral l y req u i res th at a t ax p ay er ei t h er cap i t al i ze o r am o rt i ze t he s t art -up ex p en s es o f a b u s in es s . ATOB was fo rm edi n Au g u s t 2 0 0 7 an dd i d n ’ t o p en i ts d o o rs u n t i l M arch 2 0 0 8 , b u tth e Co m m i ss i o n er d id n o t d i sal l o w th e Bro w n s ’ cl ai m ed 2 0 0 7 ex p en s es o n thi s g ro un d . Th i s m ean s th e Bro wn s weren ’ t p u to n n o t i ce t h at t h ey m i g h t h av e b een ab l e t o cap i t al i ze an d reco g n i ze t hei r 2 0 0 7 ex p en s es i n a l at er y ear. See s ec. 1 9 5 (b ); s ec. 1 .1 9 5 -1 (b ), In co m e Tax Reg s . W e’ l l th erefo re referee t h e fi gh tas th e p art i es ch os e t o fi g h t i t . See M i ch
. M o b i l e Ho m e & Recreat i o n al Veh i cl e In s t . v . Co m m i s s io n er, 6 6 T.C. 7 7 0, 7 8 0 n .7 (1 9 7 6 ); s ee al so Pro b an d t v . Co m m i s s io n er, T.C. M em o . 2 0 1 6 -1 35 , at* 1 9 n .1 6 (d i s cu s s i ng p reju d i ce t o p art i es wh en i ss u e i s rai s edaft er ev i d en t i ary reco rdi s cl o s edan dreq u i res n ew ev i d en ce t o res o l v e).- 4 2 -

[* 4 2 ] s ect i o n 2 7 4, es p eci al l y i n l i g h t o f th ei r h o n es tad m i s s io n th at t h ey dro v e t h e
cars fo r b o th b u s i n es s an dp ers o n al u s e. Th e Bro wn s d i s ag ree an ds ay th atth ey
n ev er ad m it t edt o p ers on al u s e o f t h ei r v eh i cl es , an dth atth ey wo u l d ’ v e p ro v i d ed t h e RA Frei t as wi t h m i l eag e l o g s du ri n g th ei r au d i th ad h e as k ed fo r t h em . Tax p ay ers h av e t h e b u rd en t o es t ab l i s h t h ei r en t i t l em en tt o d edu ct i o n s u n d er
s ect i on 1 6 2 , an dm

u s tk eep g o o dreco rd s t o d o s o . Secs . 1 6 2 (a), 6 0 0 1 ; Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. 4 3 8 , 4 4 0 (2 0 0 1). Th ey m u s tb e ab l e t o p ro v e (1 ) t h e
ex i s t en ce o f t h e ex p en s e, (2 ) t h atth e ex p en se was i n cu rred du ri n g th e t ax ab l e y ear fo r wh i ch i twas d edu ct ed , (3 ) t h atth e ex p en s e was i n cu rred wh i l e carry i ng o n a t rad e o r b u si n es s , an d(4 ) t h atth e ex p en s e was o rd i naryan dn eces s ary . Sec. 1 6 2 (a); s ec. 1 .1 6 2 -1 (a), In co m e Tax Reg s . Th e fai l u re t o m ai n tai n an dp ro du ce
reco rd s th ats up p o rth i s p o s i t i o n co u n t s h eav i l y ag ai n s ta t ax p ay er’ s at t em p t ed p ro o f. Ro g ers v . Co m

m i s si o ner, T.C. M em o . 2 01 4 -1 4 1, at* 17
. Tax p ay ers m

u stco m p l y wi t h h ei g ht en ed s ub s t an t i at io n req u irem en ts fo r
ex p en s es as s o ci at edwi t h th e p u rch as e an du s e o f a car b ecau s e t h e Co d e g en eral l y d o es n’ tal l o w p eo p le t o d edu ctth ei r p ers o n al ex pen s es , an d cars are eas il y u s ed fo r a m i x o f b u s i n es s an dp ers o n al p u rp o s es . See s ecs . 2 7 4(d )(4 ), 2 8 0 F(d )(4 )(A)(i ). Th es e h ei g h t en edreq ui rem en t s i ncl u d e p ro o f o f th e am o u n to f t h e ex p en s e, t h e t i m e o f u s e o f t h e p ro p ert y , an dth e b us i n es s p u rp os e o f t h e u s e.- 4 3 -

[* 4 3 ] Sec. 1 .2 7 4 -5 T(b )(6 ), Tem p o raryIn co m e Tax Reg s ., 5 0 Fed . Reg
. 4 6 0 1 6 (No v. 6 , 1 9 8 5 ). Th is al m o s tal way s m ean s a t ax p ay er h as t o k eep an acco u n t b o o k , d i ary , l o g , s t at em en to f ex p en s e, o r o t h er s i m i l ar d ocu m en t ary ev i d en ce wi t h
co n tem p o ran eo u s en t ri es as h e m ak es each ex p en d itu re. See i d . p ara. (c)(2 ), 5 0 Fed
. Reg . 4 6 0 1 7 . Tax p ay ers al s o can ’ tes t i m at e s ect io n 2 74 ex p en s es --t h ey m u s t p ro v e each ex pen s e. Sch l ad w ei l er v . Co m m i s s i o n er, T.C. M em o . 2 0 0 0 -3 51 , 2 0 0 0 W L 1 6 9 0 2 8 2 , at * 2 , aff’ d , 2 8 F. Ap p ’ x 6 0 2 (8 t h Ci r. 2 0 0 2 ). On th ei r Sch edu l es C fo r Rev eren dBro wn ’ s m i n i s t ry , th e Bro w n s cl ai m ed
an $ 1 8 ,0 0 0 d edu ct i o n fo r “ [r] en to r l eas e” o f “ [v ] eh i cl es , m ach i n ery , an d eq u ip m en t ,” fo r 2 0 07 ; a $ 2 7 , 2 5 0 d edu ct i o n fo r “ [c] ar an dtru ckex p en s es ,” fo r 2 0 0 8 ; an dan $ 1 8 , 8 0 1 d edu ct i o n fo r “ o t h er ex p en s es ” fo r 2 0 0 9. Th es e cl ai m ed d educt i o n s rel at e o nl y

t o l eas e p aym en t s an do t h er car ex p en s es . W e ag ree wi t h the Co m

m i s s i o n er’ s d i s al l o wan ce o f p arto f t h es e ex p en s es . Th e o nl y ev id en ce t h e Bro wn s p ro v i d ed u s i s th ei r t es ti m o n y an dtwo M erced es Ben z car l eas es , b utn ei t h er i s s u ffi ci en tu n der s ect i o n 2 7 4 (d ). Th e Co m m i s s i o n er
s eem s t o h av e b een m o re l en i en t , b ecau s e th e ex p en ses th ath e al lo wed duri n g
au d itap p ear t o h av e b een t h e ap p ro x im at e am o un t s thatth e Bro wn s co u l d p ro v e t h ey s p en to n l eas e p aym en t s --at l eas tfo r 2 0 0 7 an d2 0 0 8 --wi t h o u tth e ad d it i o n al p ro o f th ats ect i o n 2 7 4 req u i res . Du e t o th e Bro wn s ’ fai l u re t o es tab l i s h th e p l ace- 4 4 -

[* 4 4 ] an d t i m e, am ou n t , an d p u rp o s e o f t hei r car ex p en s es , we d i s al l o w an y ad d it i o n al am o u n ts n o tal read y co n ced ed
. IV. Sect io n 6 6 6 2 (a) Accu racy -Rel at edPen al t i es Th e o n l y rem ai n i n g qu es t i o n i s wh et her t h e Bro wn s are l iab l e fo r an
accu racy -rel at edp en al ty

fo r each y ear at i s s ue. Th e Co m m i s s i o n er arg u es th at t h ey are b ecau se t h ei r u nd erp aym en t s o f t ax were at t ri bu t ab l e t o t h ei r “ neg l i g en ce
o r d i s reg ard o f t h e ru l es an dreg u l at i o n s” an dal s o t o s ub s tan t i al u n d ers tat em en t s
o f i n co m e t ax . Sect io n 6 6 6 2 (a) i m

p o s es a 2 0 % p en al t y

wh en t here i s “ [a] n y

s ub s t an t i al
u n d ers t at em en to f i n co m e t ax , ” i d
. s ub s ec. (b )(2 ), wh i ch ex is t s i f t h e t ax
u n d ers t at em en tex ceed s th e g reat er o f $ 5 ,0 0 0 o r “ 1 0 p ercen to f th e t ax req u i redt o b e s h ow o n th e ret u rn ,” i d . s ub s ec. (d )(1 )(A). Th e Co m m i s s i o n er m eet s h is b u rd en
o f p ro du ct i o n fo r th es e p en al t i es b ecau s e t h e Bro wn s ’ u nd ers t at em en t s fo r 2 0 0 7 , 2 0 0 8 , an d2 0 0 9 ex ceed b o t h $ 5 ,0 0 0 an d 1 0 % o f t h e t ax req u i redt o b e s h o wn o n t h ei r ret u rn s . 1 8

1 8 W e al read y

g ran t ed th e Co m

m i s s i o n er’ s m o t i o n t o reo p en t h e reco rdan d ad m i t t edh i s p en al t y -ap p ro v al fo rm . Th e Co m m i ss i o n er t h erefo re m eet s t h e s up erv i s o ry -ap p ro v al p o rt i o n o f h i s b u rd en o f p ro du ct i o n. See s ec. 6 7 5 1 (b )(1 ); Graev v . Co m

m i s si o ner, 1 4 9 T.C. 4 8 5 , 4 9 2 -9 4 n .1 4 (2 0 1 7 ) (ci t i n g Ch ai v . Co m m i s s i o n er, 8 5 1 F.3 d1 9 0 , 2 2 1 (2 dCi r. 2 0 1 7 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o. 2 0 1 5 -4 2 ), s upp l em en t i ng an do v erru l i n g i n p art1 4 7 T.C. 4 6 0 (2 0 1 6).- 4 5 -

[* 4 5 ] Th e b u rd enth ens h i ft s t o th e Bro wn s t o t ry t o av o i dth e p en al t i es b y
s h o wi n g th atth ey

act edwi t h reas on ab l e cau s e an di n g oo dfai t h
. See s ec. 6 6 6 4 (c)(1 ); s ec. 1 .6 6 6 4 -4 (a), In co m e Tax Reg s . Th ey arg u e t h at t h ey

rel i edi n g o o dfai t h o n thei r t wo t ax p rep arers , M r. Bl aes an dM s . Sel f. To s u cceed i n th i s arg u m en t , th ey ’ ll h av e t o es t ab l i s h that :

• t h ei r ret urn p rep arers were co m p et en tp ro fes si on al s wh o h ad s u ffi ci en tex p ert i s e t o ju s t i fy rel i an ce;

• t h ey

p ro v id edn eces s ary

an daccu rat e i n fo rm at i o n t o thei r ret u rn p rep arers ; an d

• t h ey

actu al l y rel i edi n g o o dfai t h o n th ei r ret u rn p rep arers ’ ju d g m en t
. See Neo n at o l o g y

As s o cs ., P.A. v . Co m

m i s s i o n er, 1 15 T.C. 4 3 , 9 9 (2 0 00 ), aff’ d , 2 9 9 F.3 d2 2 1 (3 d Ci r. 2 0 02 ). Adv i ce fro m a p ro fes s io n al m u stn o tb e b as edo n
u n reas o nab l e fact ual o r l eg al as s u m p t io n s , an dthe p ro fes s i o n al m ay n o t
u n reas o nab l y

rel y o n a t ax p ay er’ s o wn rep res en tat i o n s , s t at em en t s , fi n d i n g s , o r ag reem en t s . Sec. 1 .6 6 64 -4 (c)(1 )(i i ), In co m e Tax Reg s . W e’ l l t ak e each p rep arer i n turn . Mr . Bla es . M r. Bl aes was th e Bro wn s ’ l o n g t i m e t ax p rep arer, an dp rep ared t h e Bro wn s ’ 2 00 7 i nco m e an dATOB’ s p art ners h i p t ax retu rn s . Su ch a l o ng p ro fes s i on al rel at io n s h i p l et s u s fi n dth at t h e Bro wn s h add ev el op ed a h i g h l ev el o f- 4 6 -

[* 4 6 ] tru s ti n M r. Bl aes . Bu tth ati s n o tth e s am e as reas o nab l e rel i an ce. M r. Bl aes , wh i l e h o ld in g a d eg ree i n acco u n t i ng , was n ot a CPA, an dwas n o tfu l l y
co m fo rt ab l e wi t h th e p art ners h i p retu rn . He t o l dth em th ath e was p ret t y
u n fam il i ar wi t h p art n ers h i p retu rn s , h av i n g p rep ared o n l y a few o v er t h e co u rs e o f h i s career, an ds t ro n g l y

s u g g es t edth atth ey

t ak e ATOB’ s 2 0 0 7 p art n ers hi p retu rn t o a CPA fo r fu rt h er rev i ew b efo re fi l i n g . Fro m wh atwe can t el l, th e Bro wn s ch o se n o tt o d o s o . Anad d i t i o n al p ro b l em i s th atth e Bro w n s d i dn ’ tt el l M r. Bl aes ab o utth e “ g i ft s” fro m

m em bers o f t h e CJ C co n g reg at i o n . Th atm ean s th atM r. Bl aes d i dn o tev en h av e a ch an ce t o g iv e t h em ad v i ce o n th e b i g g es tp arto f t h ei r
co n tes t edi n co m e. As a res u l t , we fi n dth atthe Bro wn s h av e fai l edt o es t ab l i s h t h atth ey act edwi t h reas on ab l e cau s e an di n g o o dfai t h fo r 2 00 7
. Ms . S el f

. Th e Bro wn s ’ cas e fo r rel y i n g o n M s . Sel f’ s ad v i ce an d p rep arat i o n
o f t h ei r 2 0 08 an d 2 0 0 9 t ax retu rn s i s s t ro n g er. M s . Sel f was , u n l i k e M r. Bl aes , a CPA an d at t en d edco n ti nu i n g -edu cat i o n co u rs es . An d wh i l e s h e d i d n ’ th av e a g reat d eal o f ex peri en ce wi th p art n ers h ip retu rn s , s h e n ei t h er p u t t he Bro wn s o n
n o t i ce t h ats h e was n ’ tfu l l y co m fo rt ab l e i n wh ats h e was d oi n g n o r ad v i s edth em t o
s eekfu rt h er rev i ew b y s om eo n e el s e. Sh e m u s th av e fel t co nfi d en t en ou g h wi t h h er cap ab i l i t i es as s h e fi l edth e Bro wn s ’ retu rn s fo r 2 0 0 8 an d2 0 0 9 . W e t h i n kth i s- 4 7 -

[* 4 7 ] ju s t i fi edthe Bro wn s ’ co n fi d en ce t h atM s . Sel f g o ti tri gh t . W e t h erefo re fi n d t h atM s . Sel f h ad s uffi ci en t ap p aren tex p ert i s e t o ju st i fy rel i an ce. Th e p ro b lem i s th at M s . Sel f t es t i fi edth at s he was u n aware o f t he Bro wn s ’

“ g i ft s ” fro m

co n g reg an t s atth e CJ C. Un l i ke M r. Bl aes , h o wev er, M s . Sel f h ad d o n e s om e acco u nt i n g fo r the CJ C b efo re s h e s t art edt o p rep are t h e Bro wn s ’ ret u rn s . Th e Bro wn s kn ew t h i s , an ds o we t h i n ki tm o re l i kel y t h an n o t t hatth ey
reas on ab l y

b el i ev eds h e was aware o f t he CJ C’ s co n t ri b u ti o n an d co l l ect io n
s y s t em , an dth atRev eren d Bro wn h i m s el f was co l l ect in g s ub s t an t i al s um s i n

“ g i ft s ” an da p u rp o rt edp ars o n ag e al l o wan ce. W e al s o b el iev e h er t es t i m o ny th at
s h e wo u l dco l l ectth ei r t ax d o cu m en t s an d o ccas i o n al l y reach o utt o t h em i f s h e t h o u g h ts o m ethi n g d i d n ’ t l o o k ri g h t . Th i s m ak es i tm o re p l au s i b l e t h atth e Bro wn s
reas on ab l y

rel i edo n h er t o rep o rtth ei r i n co m e an dd edu ct i o ns co rrect l y --o r atl eas t
as ks o m e fo ll o wup qu es t i o n s i f s h e h adco n cern s . W e d on ’ tth i n k Rev eren d Bro w n d en i edh er an y

i n fo rm at i o n th ats h e as k edfo r, an dwe fi n d n o t hi n g i n h i s o r M rs . Bro wn ’ s educat i o n o r ex p eri en ce t h atwo ul d h av e reas o n ab ly cau s edth em
n o tt o rel y

o n th e accu racy

o f h er p rep arat io n o f th ei r ret u rn s . W e t herefo re fi n d t h atth e Bro wn s rel i edi n g o o dfai th o n p ro fes s i o nal ad v i ce fo r 2 0 0 8 an d2 0 0 9
.- 4 8 -

[* 4 8 ] Th i s i s a s p l itres u l t, s o
Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.