T.C. M em o . 2 0 1 7 -3 6

UNITED STATES TAX COURT

J ASON M . SCHEURER, Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 5 3 08 -1 4
. Fi l edFeb ru ary 2 1 , 2 0 1 7
.

J as o n M . Sch eu rer, p ro s e. Rach el G. Bo rd enan d W arren P. Si m o n s en , fo r res p o nd en t.

M EM ORANDUM FINDINGS OF FACT AND OPINION LAUBER, J u d g e: W i th res p ectt o p et i t i o ner’ s Fed eral i n co m e t ax fo r 2 0 0 9
an d 2 0 1 0 , th e In t ern al Rev en u e Serv i ce (IRS o r res p o nd en t) d et erm i n edd efi ci en ci es , an ad d i ti o n t o t ax , an d p en al t i es as fo l l o ws : 1

1 Al l s t atut o ry

referen ces are t o th e In t ern al Rev en u e Co de i n effect fo r t h e (co n ti n u ed ...)- 2
-

[* 2 ] Ad d it i on t o t ax Pen al ty Year Defi ci en cy s ec. 6 6 5 1(a)(1 ) s ec. 6 6 6 2 (a) 2 0 0 9 $ 4 4 ,6 0 7 $ 1 2 , 3 4 3 $ 8 ,9 2 1 2 0 1 0 3 ,8 7 3 -0 - 7 7 5 Aft er co n ces s i o ns , 2 t h e i s su es fo r d eci s i o n are wh et h er p et i t i o n er fo r 2 0 0 9 i s en t i tl ed , b y v i rtu e o f cert ai n al l eg edad v an ces o f fu nd s , t o ei t h er a b u s i n es s b add eb t d educt i o n o r a p art n ers h ip l o ss d edu ct i o n. W e h o l dth ath e i s en t it l edt o n ei t h er. FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at i o n o f fact s an dth e at t ach ed ex h i b i ts are i n co rp o rat ed b y th is referen ce. Pet i t i o n er res i

d ed i n V i rg i n i a wh enh e p et i t i on edth i s Co u rt
.

1 (...co n t in u ed ) y ears i n i s s u e, an dal l Ru l e referen ces are t o t h e Tax Co u rt Ru l es o f Pract i ce an d Pro cedure. W e ro u n d al l m o n et ary am o u n t s t o t h e n eares td ol l ar. 2 Fo r 2 0 0 9 p et i ti o n er co n ced es th ath e: (1 ) recei v ed $ 5 5,7 0 2 o f t ax ab l e wag es ($ 46 ,4 3 1 o f wh i ch h e i n co rrect l y rep o rt edo n a Sch edu l e C, Pro fi to r Lo s s Fro m Bu s i n es s ), (2 ) i s n o t en t i tl edt o d edu ct i on s i n th e ag g reg at e am o u n to f $ 2 0 ,5 5 2 as cl ai m edo n th atSch edu l e C, an d(3 ) i s l i ab l e fo r an ad d i t io n t o t ax an d (t o t h e ex t en tthe d efi ci en cy i s s u s t ai n ed ) an accu racy -rel at edp en al t y as s etfo rt h i n the n o t i ce o f d efi ci en cy . Fo r 2 0 1 0 p et it io n er co n ced es th ath e: (1 ) recei v ed $ 7 3 ,3 4 2 o f t ax ab l e wag es ($ 5 7 ,1 3 4 o f wh i ch h e i n co rrect l y rep o rt ed o n a Sch edul e C), (2 ) i s n o ten t i t l ed t o d edu ct i o n s i n th e ag greg at e am o u n t o f $ 3 3 ,3 3 9 as cl ai m ed o n th atSch edul e C, an d (3 ) i s l i ab l e fo r an accu racy -rel at edp en al ty as s etfo rt h i n t h e n o ti ce o f d efi ci en cy . Fo r 2 0 0 9 an d2 0 10 res p o nd en t co n ced es thatp et i t i o n er i s en t i t l edt o m i s cel lan eo u s d edu ct i o ns o f $ 1 4 ,2 32 an d $ 2 9 ,5 4 8 , res p ect i v el y , fo r “ o t her ex p en s es ” o n Sch edu l e A, It em i zedDedu ct i o n s. Al l o t h er ad ju s t m en t s (ap artfro m

th o s e d i s cu s s edi n t h e t ex t ) are co m pu t at i o nal
.- 3
-

[* 3 ] Du ri n g 2 0 0 9 p et i t i o n er wo rk edfu l l t i m e as a fi n an ci al ad vi s er. Fo r p arto f t h e y ear h e was em

pl o y edb y W ach o vi a Sh ared Res o urces an dRaym o ndJ am es Fi n an ci al Serv i ces . He s ub s equ en t l y wo rk edfo r b o t h fi rm s as an i n dep en d en t
co n tract or. Th e t ax d efi ci en cy

i n d i sp u t e g ro ws o u to f p et i t i o ner’ s i nv o l v em en twi t h Co n t in en t al Fi n an ci al Serv i ces (CFS), a Fl o ri d a s ol e p ro p ri et o rs h i p fo rm edb y Kev in Zi nn . Pet i t i o n er h adkn o wn M r. Zi n n fo r m o re t han 2 0 y ears , an dth ey were g o o dfri en d s . Pet i t i o n er was th e b es tm an i n M r. Zi n n ’ s wed d i n g . CFS o ri g in al l y

o p erat ed a cal l cen t er b u s i n es s s el li n g v ari o u s p ro duct s an d
s erv i ces . So m et i m e i n 2 0 0 8 i t m o v edt o a n ew l o cat i o n i n Fl o ri d a an d s t art eda

“ ro bo cal l ” o p erat i o n t h atem p l o y ed3 0 t o 4 0 wo rk ers . Us i ng “ ro b o cal l i n g” eq u i p m en t , CFS co n t act edco ns u m ers wi th h eav y cred i tcardd eb tth atb o re h i gh i n t eres t rat es . In ex ch an g e fo r an up fro n tfee, CFS o ffered t o n eg ot iat e wi t h th e co n s u m er’ s b an ki n an effo rtt o redu ce t h e i n teres trat e. If th e co n s u m er accep t edth i s
o ffer, CFS wo u l d ch arg e i t s fee t o the co n s u m er’ s cred i t card
. In o rd er t o ch arg e i t s fees t o co n s um ers ’ cred i tcard s , CFS n eed edt o h av e

“ m erch an tacco u n t s ” wi t h o n e o r m o re b an k s. Becau s e M r. Zi n n h adv ery p o o r cred i t , n ei t her h e n o r CFS co u l ds ecu re a m erch an tacco u n t wi t h an y b an k . M r.- 4
-

[* 4 ] Zi n n acco rd i n g ly

s o u g h tas s i st an ce fro m p et i t io n er, wh o ag reed t o u s e h i s
s up eri o r cred i t t o h el p o p en m erch an tacco u n t s o n b eh al f o f CFS. To ward t h i s en d , p et i t i o n er an dLo u i s J as ik o ff i n Oct o b er 2 0 0 8 fo rm edJ as i

k o ff Co n s u l ti n g LLC (J C). Th e p art n ers h i p ag reem en tp ro vi d edthatp et i t i on er
wo u l db e a 9 0% p art ner an dM r. J as i k o ff a 1 0% p art n er. Pet i ti o ner was t o b e
s o l el y res p o n s ib l e fo r fi n an ci n g J C, an d M r. J as i k o ff was t o b e res p o n s i b l e fo r d ay -t o -d ay

o p erat i o n s , i n cl u d i n g p rep ari n g fi n an ci al s t at em en t s an dt ax retu rn s . Th e p art n ers h i p ag reem en t s tat edth atJ C was b ei n g fo rm edfo r t he p u rp o s e o f

“ p ro v i d i n g m erch an t p ro ces s i n g s erv i ces p ri m ari l y fo r, b u tn o tl i m i t edt o , [CFS] .” Du ri n g 2 0 0 8 an d2 0 0 9 J C s etup m erch an tacco u nt s wi t h b an k s i n fo u r
co u nt ri es , i n cl u d i n g Ch in a an dth e Ph i l i p p i n es . Wh en CFS ch arg eda fee t o a co n s u m er’ s cred i tcard , th e p aym en two u l d b e rem i t t edt o o n e o f t h o s e b an k s . Th e b an k wo ul dd educti ts u s u al p ro ces s i n g ch arg e; h o l d 1 0 % o f t h e p aym en ti n res erv e fo r s i x m o nt h s t o acco u n tfo r p o t en ti al refu n dcl ai m s ; an ds en dthe n et
am ou n tt o J C. J C wo u l ds en dth i s n etam o u n tt o CFS an d, aft er t h e s i x-m on t h h o l dwas rel eas ed , ret ai n t h e 1 0 % res erv e am ou n t as i t s p ro fi t. J C d i d n o t s etup
m erch an tacco u n t s fo r, o r p erfo rm m erch an tp ro ces s i n g s erv i ces fo r, an y en t i t y
o t h er t han CFS.- 5
-

[* 5 ] CFS b eg an t o ex p eri en ce fi n an ci al p ro b lem s s o o n aft er co m m en ci n g t h e

“ ro bo cal l ” o p erat i o n. M r. Zi n n d i dn o th av e s u ffi ci en tcap i t al t o fu n dth i s o p erat i on , an dh e s o u g h t fi n an ci al as s i st an ce fro m p et i t io n er. Pet i t i o ner co n t en d s th at h e ag reedt o p ro v id e as si s tan ce an dth ath e cau s edfu n d s t o b e t ran s ferred t o CFS i n tw o w ay s . Fi rs t , p et i ti o n er al leg es th ath i s g irl fri en datthe t i m e, J en n i fer So d en , m ad e wi re t ran sfers du ri n g 2 0 09 fro m h er p ers o n al b an k acco u n tt o CFS i n t h e ag g reg at e
am ou n to f $ 8 4 ,0 0 0 . Bu t s h e t es t i fi ed t h ats h e d i d n otkn ow wh et h er t h i s m o n ey
wen t t o p et i t i o n er, J C, o r CFS. Her b an kacco u nts t at em en t s ev i d en ce t hes e t ran s fers ; b utn ei t h er s h e n o r p et it i o n er co u l d es t ab l i s h t h atth e acco un t n um b ers t o wh i ch th e fu n d s were wi redb el o n g edt o CFS. M s. So d en cl earl y ad v an cedth es e fu n d s t o p et i t i o n er o r o n h i s b eh al f, b ecau s e p et i t i on er’ s fat h er ev en tu al l y p ro v i d ed M s . So den wi t h en o u g h m o n ey t o m ak e h er wh ol e. Bu tth ere i s n o ev i d en ce, ap art fro m p et i t i o n er’ s t es t i m o ny , th atth i s $ 8 4,0 0 0 was actual l y recei v ed b y CFS. Seco n d , p et i t i o n er al l eg es th at m o s to f t he d eb i t s t o J C’ s b an k acco u n tdu ri n g 2 0 09 rep res en t edl o an s t o CFS. Bu t atl eas t$ 19 ,8 0 0 o f th es e d eb i t s rep res en t edp aym en t s t o M s . So d enan datl eas t$ 2 2 , 6 0 0 rep res en t ed p aym en t s t o p et i t i o n er;
m an y o th er d eb it s rep res en t edp aym en to f M r. J as ik o ff’ s ex p en ses . M o s t o f t h e
o t h er l arg e d eb i t s ap peared t o b e am o u n t s th at J C rem i t t edt o CFS p u rs u an tt o i t s- 6
-

[* 6 ] “ m erch an tp ro ces si n g” act i v i t y . M r. J as i k o ff cred i b l y t es t i fi edth ato n atl eas t
o n e o ccas i o n h e wi t h d rew cas h fro m J C’ s b an kacco u nt , h an d -carri edi t t o Fl o ri d a,
an d d i st ri b u t edi tt o CFS em pl oy ees wh en M r. Zi n n co u l dn o tm ak e p ayro l l . Th e
reco rdi n cl u des s i g nedrel eas es fro m CFS em p lo y ees ev i d en ci n g recei p to f $ 1 9 ,8 4 2 fro m

M r. J as i k o ff. CFS’ fi n an ci al s i tuat i o n co n t in u edt o wo rs en as th e fi n an ci al cri s i s t o o ki t s t o l l . Pet it i o n er an dJ C en d ed t h ei r i n v o l v em en twi t h CFS s o m et i m e aft er 2 0 0 9
. J C ap paren t l y

co n t i n u edt o ex i s t , atl eas ti n fo rm , th ro u g h 2 0 1 3
. 3 Pet i t i o ner fi l eda d el in qu en ti n d i v i du al i nco m e t ax return fo r 2 0 09 o n Au g u s t2 6 , 2 0 1 1 . On t h i s retu rn h e cl ai m ed , o n Fo rm 4 7 9 7 , Sal e o f Bu s in es s Pro p ert y , a b u s in es s b add eb td edu ct i o n o f $ 1 2 2 ,8 5 6 at t ri b u tab l e t o fu nd s h e h adal l eg ed l y ad v an ced(d irect l y

o r t h ro u g h M s . So den ) t o CFS, wh i ch CFS al l eg ed l y h adn o t

3 M r. Zi nn was i n carcerat edatth e t i m e o f t ri al wi t h an an t ici p at edrel eas e d at e n o earl i er t han 2 0 19 . Pet i t i o n er s o u g htt o i n t ro du ce i n t o ev id en ce an affi d av i t fro m M r. Zi n n , n o t ari zedb y

a p ri s on o ffi ci al , th atd es cri b edi n g en eral t erm s th e b u s i n es s rel at i on s h ip b et ween J C an dCFS. Res p on d en to b ject edo n h ears ay g ro u nd s , an d we t o okth is o b ject i o n u n d er ad vi s em en t . Pet i t io n er s t at edth atth e s o l e p u rp o s e o f t h e affi d av i twas t o es t ab l is h th e arran g em en tb et ween J C an dCFS du ri n g 2 0 0 9 . W e co n cl u d e t h atthe t erm s o f th atarran g em en t were es t ab l i s h edb y t h e d o cu m en t ary

ev i d en ce an dth e t es t i m o n y o f p et it i on er, M r. J as i k o ff, an da fo rm er CFS em

p l o y ee. Becau s e M r. Zi n n ’ s affi dav i ti s cu m u l at iv e o f t h e ex i s t i n g ev i d en ce, we wi ll s u s t ai n res p o n d en t ’ s o b ject i o n t o i t s ad m i s s i bi l i t y .- 7
-

[* 7 ] rep ai d . He d i dn o t rep o rto n th atreturn an y i n co m e, ex pen s es , o r o t her p as s t h ro u g h i t em s fro m

J C. Th e IRS s el ect edfo r ex am i n at i o n p et i t i o n er’ s d el i n qu en t 2 0 0 9 retu rn an d h i s t i m el y fi led2 0 1 0 ret u rn . Fo r 2 0 09 th e IRS d i s al l o wedth e b u s i n es s b add eb t d educt i o n i n fu l l an d d et erm i n edan ad d i t i o n t o t ax an dan accu racy -rel at edp en al

t y . Th e IRS i s su ed p et i t io n er a t i m el y n o t i ce o f d efi ci en cy fo r b o t h y ears , an do n Oct o b er 2 4 , 2 0 1 4 , h e t i m el y p et i t i o n edthi s Co urt
. Fo u r d ay s l at er, o n Oct o b er 2 8 , 2 0 1 4 , J C fi l eda d el i n qu en t Fo rm 1 0 6 5 , U.S. Ret u rn o f Part n ers h i p In co m e, fo r 2 0 0 9 . Onthi s retu rn i trep o rt eda l o s s o f $ 2 1 9 ,5 9 8 , wh i ch was at t ri b ut ab l e i n l arg e p artt o cl ai m ed“p rep ai dex p en s es ” i n
ex ces s o f $ 1 7 0,0 0 0 . Th es e “ prep ai dex p en s es ” co rres p o n d edt o fu n ds th atp et i ti o n er al l eg ed l y

h adad v an ced(d i rect l y

o r i n d irect l y ) t o CFS t o co v er i t s p ayro l l
an d o t her o p erat i n g ex p en s es , i .e., th e s am e ad van ces th at fo rm edth e b as i s fo r t h e b ad d eb td educt i o n cl ai m edo n p et i t io n er’ s i n d i v idu al return fo r 2 0 09
. Pet i t i o ner co n ten d s th ath e i s en t i t l edt o d edu ctfo r 2 0 0 9 h i s 9 0% s h are o f J C’ s s up po s ed p art n ers h i p l o s s, o r $ 1 9 7 ,3 6 8 . Th e reco rdi n cl ud es a co py o f a Sch edu l e K-1 , Part ner’ s Sh are o f In co m e, Dedu ct i on s , Cred it s , et c., al l eg ed l y i s s u ed by J C t o p et i t i o n er fo r 2 0 0 9 . Ho wev er, p et i t io n er s ub m it t edn o ev i d en ce t o
s ub s t an t i at e t h e cl ai m edp art n ers h i p l o s s ap artfro m th e t es ti m o n y

an d- 8
-

[* 8 ] d o cu m en t ary

ev i d en ce (d is cu s s ed ab ov e) rel at i n g t o h i s al l eg edad v an ces o f fu n d s t o CFS. OPINION Th e IRS’ d et erm i n at i o ns i n a n o t i ce o f d efi ci en cy are g en eral l y

p res u m ed
co rrect , an dth e t ax p ay er b ears th e b u rd en o f p ro v i n g t h o se d et erm i nat i on s erro n eo us . Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3 ). Th e t ax p ay er b ears th e b urd en o f p ro vi ng h i s en t i t l em en tt o d edu ct i o ns al l o wedb y t h e Co d e an d
o f s ub st an t i at i n g th e am ou n t s o f ex p en s es u n d erl y i n g cl ai m edd edu ct i o n s . INDOPCO, In c. v . Co m

m i s s i o ner, 5 0 3 U.S. 7 9 , 8 4 (1 99 2 ); s ec. 1 .6 0 0 1-1 (a), In

co m e Tax Reg s . Un der cert ai n ci rcu m s t an ces th e b u rd en o f p ro o f o n fact u al i s s u es
m ay s h iftt o res p o n den t . See s ec. 7 4 9 1 (a)(1 ). Bu tp et i t i o ner i n t ro du cedl i tt l e i f
an y “ cred i b l e ev i d en ce,” s ec. 7 4 9 1(a)(1 ), an dh e d i dn o t “ m ai n t ai n [] al l reco rd s req u i red ” b y

th e Co d e, s ec. 7 4 9 1 (a)(2 )(B). He t h u s b ears th e b u rd en o f p ro o f. A. Bu s i n es s BadDeb t Dedu ct i o n Sect io n 1 6 6 (a)(1 ) p ro v i d es th at“ [t ] here s h al l b e al lo wedas a d edu ct i o n an y d eb t wh i ch b eco m es [wh o l l y ] wo rt h l es s wi t h in th e t ax ab le y ear.” Fo r a n o nb u s i

n es s b add eb t h el d b y

a t ax p ay er o t h er t h an a co rp o rat i o n , s ect i on 1 6 6 (a)(1 ) d o es
n o tap pl y , an dth e t ax p ay er i s al l o weda s ho rt -t erm cap i t al l o s s fo r th e t ax ab l e y ear- 9
-

[* 9 ] i n wh i ch th e d eb tb eco m es co m p l et el y wo rt h les s . Sec. 1 6 6 (d )(1 ); s ec. 1 .1 66
- 5 (a)(2 ), In co m e Tax Reg s . Sect io n 1 6 6 (d )(2 ) d efi n es a b u si n es s d eb tas “ a d eb tcreat edo r acq u ired

* * * i n co nn ect io n wi t h a t rad e o r b u s in es s o f th e t ax pay er” o r “ a d eb tthe l o s s fro m th e wo rth l es sn es s o f wh i ch i s i n cu rred i n t h e t ax p ay er’ s t rad e o r b us i n es s .” To b e el i g i bl e t o d edu cta l o s s as a b u s i n es s b add eb t , a t ax p ay er m u s ts h o w th at h e
was en g ag ed i n a t rad e o r b u s i n es s an dth at t he d eb t was p ro x i m at el y rel at edt o h i s t rad e o r b u si n es s . Pu t o m a Co rp . v . Co m m is si o n er, 6 6 T.C. 6 52 , 6 73 (1 9 7 6 ), aff’ d , 6 0 1 F.2 d7 3 4 (5 th Ci r. 1 9 7 9); s ec. 1 .1 6 6 -5 (b ), In co m e Tax Reg s . To b e en g ag ed i n a t rad e o r b us i nes s , th e t ax p ay er m u s tp art i ci p at e i n th e act i v i t y wi th co n t i n u i t y
an d reg u l ari ty , an dh is p ri m ary p u rp o s e fo r en g ag i n g i n t h e act i v i t y 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 ger, 4 80 U.S. 2 3 , 3 5 (1 9 8 7 ). Th e
m an ag em en to f o n e’ s i n v es t m en t s , n o m at t er h o w ex t en s i v e, i s n ota “ t rad e o r b u s i n es s .” Wh i p p l e v . Co m m i s s i o n er, 3 7 3 U.S. 1 93 , 2 0 0 (1 9 6 3 ). Fo r t h ree d i s ti n ctreas o n s, we co n cl u d e t h atthe IRS co rrect l y d i s al l o wedth e $ 1 2 2 ,8 5 6 b u s i n es s b add eb t d edu ct i o n th atp et i t i o n er cl ai m edo n h i s 2 0 09 retu rn . Fi rs t , p et i t io n er fai l edt o s ubs t an t i at e t h ath e ad v an ced$ 1 2 2 , 8 5 6 t o CFS. W e d i d
n o tfi n dp et i t i o n er t o b e a p art i cu l arl y cred i bl e wi tn es s ; an dth ere i s n o ev i d en ce, ap artfro m h is t es t i m o n y , th atCFS act u al l y recei v edan y

p o rt i o n o f t h e $ 8 4 ,0 0 0- 1 0 -

[* 1 0 ] wi redfro m

M s . So d en ’ s b an k acco u n t. Pet i t i o n er l i k ewi s e fai ledt o carryh i s b u rd eno f p ro vi ng th atth e d eb it s t o J C’ s b an kacco u n t co n s t i tu tedl o an s t o CFS (as
o p p o s edt o “ m erch an tp ro ces s i n g ” rem i t t an ces t o CFS o r p aym en t s t o M r. J as i k o ff, M s . So den , o r p et i t i o n er). W e fi n dth atth e m ax i m u m am o u n t o f ad v an ces t o CFS t h atp et i t i o n er h as s ubs t an t i at edi s $ 1 9 ,8 42 , th e s u m o f t h e recei p t s th atM r. J as ik o ff g o tfro m

CFS em p l o y ees fo r p aym en to f wag es . Seco n d , p et i t i o n er d i dn o tcarryh i s b u rd en o f p ro v i n g th ath i s ad van ces t o CFS (s u ch as th ey

were) creat edb o n a fi d e i n d eb t ed n es s . A b on a fi d e d eb t i s a d eb t ari s i n g fro m

“ a d eb t o r-cred i to r rel at i o n s h i p b as edo n a v al i dan den fo rceab l e
o b l i g at i o n t o p ay

a fi x edo r d et erm i n ab l e s u m o f m o n ey .” Kean v . Co m m i s s i o n er, 9 1 T.C. 5 7 5 , 5 9 4 (1 9 8 8 ); s ec. 1 .1 6 6 -1 (c), In co m e Tax Reg s . Wh eth er an ad v an ce
o f fu n d s g i v es ri s e t o a b o na fi d e d eb tfo r t ax p u rp os es i s d et erm i n edfro m al l the fact s an dci rcu m s t an ces . See A.R. Lan tz Co . v . Un i t edSt at es , 4 2 4 F.2 d1 3 3 0 , 1 3 3 3 (9 t h Ci r. 1 97 0 ); Ro adM at eri al s , In c. v . Co m m i ss i o n er, 4 0 7 F.2 d1 1 21 , 1 1 2 6
n .2 (4 t h Ci r. 1 9 6 9 ), aff’ g i n p art , v acat in g i n p artT.C. M em o . 1 9 6 7 -1 8 7; Di x i e Dai ri es Co rp . v . Co m

m i ss i o n er, 7 4 T.C. 4 7 6 , 4 9 3 (1 9 8 0 ). “ A g i fto r co n t ri b u t i on t o cap i t al s h al l n o tb e co n s id ereda d eb tfo r p u rp o s es o f s ect i o n 1 6 6 .” Sec. 1 .1 6 6
- 1 (c), In co m e Tax Reg s .; s ee W o o dPres erv i n g Co rp . v . Un i t edSt at es , 3 4 7 F.2 d 1 1 7 , 1 1 8 (4 t h Ci r. 1 9 6 5 ).- 1 1 -

[* 1 1 ] In d et erm i n i ng wh et her an ad v an ce o f fu n d s co n s ti tut es a b o n a fi d e d eb t ,

“ eco n o m ic real i t y p ro v i d es th e t o u ch s t o n e.” Sh aw v . Co m m i s s i o n er, T.C. M em o . 2 0 1 3 -1 7 0 , at* 10 ; s ee Dav i s v . Co m m i s s i o n er, 6 9 T.C. 8 1 4 , 8 35 (1 9 7 8 ) (“ [W ] h et h

er t h e ad v an ces * * * are d eb to r eq u it y d ep en d s o n th e eco n o m i c s ub s t an ce o f t he t ran s act io n s .”). If a t h i rd -p art y l en d er wo ul d n o th av e l en t fu n d s o n th e s am e t erm s , an i nferen ce ari s es th atth e ad v an ce i s n ota t ru e l oan . See Fi n Hay Real t y Co . v . Un i t edSt at es , 3 9 8 F.2 d6 9 4 , 6 9 7 (3 dCi r. 1 96 8 ). Ani m p o rt an tfact o r i n d eci d i n g th e ch aract er o f an ad van ce i s wh et h er t h e p u rp o rt edcred i t or ex p ect s th at t h e am o un twi l l b e rep ai d. See CM A Co n s o l ., In c. v . Co m m i s s i o n er, T.C. M em o . 2 0 0 5 -1 6 , 8 9 T.C.M . (CCH) 7 0 1 , 7 2 4. Advan ces m ad e t o an i ns o l ven td eb to r g en eral ly d o n o tcreat e d eb t s fo r t ax p u rp o s es b utare ch aract eri zedas cap i t al co n t ri

b u t i o n s o r g i ft s . See Ro adM at eri al s , In c., 4 0 7 F.2 dat1 1 2 5 (l is ti n g “ do ub t fu l p ro s p ect s o f rep aym en t ” as an i m p o rt an tfact or i n d eci d i n g wh et h er an u nco n d i t i o nal o b l i g at i on t o rep ay ex i s t s ); Di x ie Dai ri es Co rp ., 7 4 T.C. at4 97 ; Dav i s , 6 9 T.C. at8 3 5 -8 3 6
. Th ere i s n o ev i d en ce t o s up p o rtp et it i o n er’ s co n t en t i on th at an y fu n d s h e ad

v an cedt o CFS g av e ri s e t o a b o n a fi d e l o an . Th ere was n o p ro m i s s o ry n o t e, n o fi xedo r d et erm i n ab l e am o u n t du e, n o s p eci fi edi n t eres trat e, n o p ri n ci p al du e d at e,
an d n o req ui rem en to f s ecu ri t y . See Bau er v . Co m m i s s i o n er, 7 4 8 F.2 d1 3 65 ,- 1 2 -

[* 1 2 ] 1 3 6 8 -1 3 7 1 (9 t h Ci r. 1 9 8 4), rev ’ g T.C. M em o. 1 9 8 3 -1 2 0 ; Es t at e o f M i x o n v . Un i ted St at es , 4 6 4 F.2 d3 94 , 4 0 2 -4 0 5 (5 t h Ci r. 1 9 7 2 ); CM A Co ns o l. In c., 8 9 T.C.M . (CCH) at 7 13 -7 1 5 . Its eem s o b vi o u s th atn o b an kwo u ldh av e l en tm o n ey t o M r. Zi n n o r CFS i n 2 0 0 9 . In d eed , th e reas o n t h atM r. Zi n n s o u g h t “ m erch an t p ro ces s i n g ” as si s t an ce fro m p et i t i o n er was t h ath i s cred i twas t o o p oo r t o en ab l e h i m t o o p en m erch an tacco u nt s h i m s el f. Th e o n l y ad v an ces t o CFS t h atp et i t i o n er s ub s tan t i at edwere M r. J as i k o ff’ s p aym en t o f wag es t o i t s em p l o y ees wh en M r. Zi n n co u l dn o tm ak e p ayro l l. Bu ti f M r. Zi n n co u l dn ot p ay

h i s d eb t s as th ey

b ecam e du e, h e was v ery l ik el y i n s o l v en t
. Becau s e th e p ro s p ect s o f rep aym en tfro m an i ns o l v en tp ers o n are q u i t e d o ub t fu l , t h i s fact s t ro n g l y su g ges ts th atM r. J as i k off’ s $ 1 9 ,8 42 ad van ce d i d n o tg i v e ri s e t o b o n a fi d e d eb t. See Ro adM at eri al s , In c., 4 0 7 F.2 d at1 1 2 5 . Ev al u at in g al l o f t h e
ev i d en ce an dt es t i m o n y i n l ig h to f t h e rel ev an tfact o rs , we co n cl u d e t hatp et i t i o n er’ s ad v an ces o f fu nd s t o CFS, t o th e ex t en th e s ub s tan t i at edth em , d i dn o tco n st i

tu t e b o n a fi d e d eb t
. Th i rd , ev en i f p et i t i o n er co u l d p ro v e t h ath i s ad v an ces t o CFS creat edb o n a fi de i nd eb t ed n es s , h e d i dn o tp ro v e t h at t h e d eb twas a “ b us i n es s b add eb t ” qu al i

fy i n g fo r d edu ct i o n u n d er s ect i o n 1 66 (a)(1 ). A l o s s i s d edu ct i b l e as a b u s i n es s b ad d eb t o nl y i f the t ax p ay er i s i n a “ b u s i n es s ” an dth e d eb ti n qu es t i o n i s p ro x i m at el y- 1 3 -

[* 1 3 ] rel at edt o th atb u s i n es s . Un i t edSt at es v . Gen eres , 4 0 5 U.S. 9 3, 9 6 (1 9 7 2 ); Dag res v . Co m

m i ss i o n er, 1 3 6 T.C. 2 6 3 , 2 8 2 (2 0 1 1). To d et erm i n e wh et h er a l o s s i s p ro x i m at el y

rel at edt o th e t ax p ay er’ s b u si n es s , we ev al u at e h is d o m i n an tm o t i v e fo r m ak in g th e l o an . Gen eres , 4 0 5 U.S. at1 0 3
. W e co ncl u d e t h at p et i ti o n er h as fai l edt o s h o w th atth e ad van ces , t o th e ex t en ts ub s t an t i at ed , b ecam e b u s i n es s b add eb t s u n der s ect i o n 1 6 6 . Pet i ti o n er was
n o ten gag edi n th e trad e o r b u s i n es s o f l en d i ng m o n ey du ri n g 2 0 0 9 . He wo rk ed fu l l t i m e du ri n g t h aty ear as a fi n an ci al ad v i s er, an dthere i s n o ev id en ce t h ath e
ev er l en tm o n ey t o an y o n e el s e. W e fi ndn o ev i d en t iarys up p o rtfo r t h e p ro p o s i ti o n th ath i s al l eg edl o ant o CFS was “ a d eb tcreat edo r acq ui red* * * i n co n n ect i on wi t h a t rad e o r b u s i n es s ” o f l en d i n g m on ey i n wh i ch h e was en g ag eddu ri n g 2 0 0 9 . See s ec. 1 6 6 (d )(2 )(A). No r was an y al l eg ed l o an “ i n cu rred i n th e t ax p ay er’ s trad e o r b u s i n es s ,” n am el y , p et i t i o n er’ s o ccup at i o n as a fi n an ci al ad v i s er. See
s ec. 1 6 6(d )(2 )(B). W e fi n dth atp et i t i o n er’ s d o m i n an tm ot i v at i o n fo r ad van ci n g fu n d s t o CFS
was p ers on al , s t emm i n g fro m h i s l o n gt i m e fri en d s h i p wi t h M r. Zi n n . He was fu l l y aware t h atM r. Zi nn h adv ery p o o r cred i t, an di t i s h i g h l y u n l i k el y th ath e wo u l d h av e ad v an cedfu n d s u n der t h es e ci rcu m s t an ces u n l es s M r. Zi n n h adb een a cl o s e p ers o n al fri en d . Becau s e p et i t io n er’ s p ri m ary m o t i vat i o n fo r ad v an ci n g fu nd s was- 1 4 -

[* 1 4 ] p ers o n al , we fi ndth atth e ad v an ces , t o th e ex t en t s ub s tan t i at ed , were n o t p ro x im at el y rel at edt o an y b u s i n es s i n wh i ch p et i t i o ner d u ri n g 2 0 09 was en g ag ed
. B. Part n ers h ip Lo s s In h i s p o s t-t ri al b ri efs p et i t i o n er l arg el y ab an d o n edh i s cl ai m

t o a b u s i n es s b ad d eb td educt i o n an di n s t eadcl ai m eden t it l em en tt o d edu cth i s s h are o f a p art n ers h i p l o s s al l eg ed l y

i n cu rred b y

J C. Oni ts d el i n qu en t Fo rm 1 06 5 fo r 2 0 0 9 , fi l ed i n Oct o b er 2 0 1 4 , J C rep o rt edg ro s s recei p t s o f $ 53 0 ,4 7 4 (rep res en ti n g i t s recei pt s fro m th e “ m erch an tacco u n t s ”) an dco s t o f g oo d s s o l do f $ 5 0 3 ,6 5 8 (rep res en t i n g i t s n etp aym en t s t o CFS). J C rep o rt edan o v eral l l o s s o f $ 2 1 9 ,5 9 8 , at t ri b ut ab l e l arg el y t o cl ai m ed“p rep ai dex p en s es ” i n ex ces s o f $ 1 70 ,0 0 0
. Th es e “ p rep ai dex p en ses ” co rres p o n d edt o th e fu n d s t h atp et it i on er o r J C h ad al l eg ed l y ad v an cedt o CFS t o co v er i t s p ayro l l an do t h er o perat in g ex pen s es , i .e., th e s am e ad van ces th at fo rm edth e b as i s fo r t h e b add eb td edu ct i o n t h atp et i t i o n er cl ai m edo n h i s i n d i v i d

u al return . He co n t en d s th ath e i s en t i t l edt o d edu cth is 9 0 % s h are o f J C’ s s up p o s edp art n ers hi p l os s , o r $ 1 9 7,3 6 8
. 4 In s up p o rto f t h is th eo ry

p et i t i o n er as s ert s t h atJ C was i n th e “ ro bo cal l i n g ” t rad e o r b u si n es s ; th atJ C h iredCFS as an “ i n dep en d en t co nt ract o r” t o o perat e t h i s

4 In h i s p o s t -tri al b ri efs , p et i t i o n er co n t en ds th atth e p art n ers h ip l o s s d edu ct i on t o wh i ch h e i s en t i t l ed i s $ 1 7 2 ,1 6 3 , rep res en t i n g th e ad v an ces t o CFS t h ath e cl ai m edt o h av e s ub s t an t i at ed
.- 1 5 -

[* 1 5 ] b u s i n es s ; an dthatJ C, i n ad v an ci n g fu n d s t o CFS, was d efray i n g “ p rep ai d
ex p en s es ” o f i t s o w n “ t rad e o r b u s i nes s .” Th i s arg u m en ti n i t ial l y s u ffers fro m

th e
s am e fl aw as p et i ti o n er’ s b add eb targ u m en t , n am el y , l acko f s ub s t an t i at i on . As d i s cu s s edp rev io u s l y , p et i t i on er s ub s t an t i at edatm os t$ 1 9 ,8 4 2 o f ad v an ces t o CFS,
an d h e s ub st an t i at edn o ne o f J C’ s o t h er ex p en s es . M o re fu n d am en t al l y , th ere i s n o ev i d en t i ary s up p o rtfo r p et i t i o n er’ s ch aract eri zat i o n o f t h e rel at i o n s h i p . J C cl earl y was n o ti n t h e “ ro bo cal l i n g ” t rad e o r b u s i n es s ; th atb us i nes s was co ndu ct edex cl us i v el y b y CFS an di t s 3 0 t o 4 0 em p l o y ees . Th e p art n ers h i p ag reem en tb et ween p et i t i o ner an d M r. J as i k off s tat ed t h atth e p art n ers hi p was b ei n g fo rm edfo r th e p urp o s e o f “ p ro v i d i n g m erch an tp ro ces s i ng s erv i ces p ri m ari ly fo r, b u tn otl i m i t edt o , [CFS] .” Th e ag reem en treci t ed
n o o t h er p u rp o s e, an d“ m erch an tp ro ces s i n g ” was th e o n l y b u s i n es s thatJ C ev er
co n du ct ed
. Pet i t i o n er t h u s h as th e rel at i o n sh i p p reci s el y b ack w ard s : Itwas CFS t h ath i redJ C as an i n d ep en d en t co n t ract or t o act as CFS’ ag en ti n s et t i n g up
m erch an tacco u n t s t o faci l i t at e CFS’ “ ro b o cal l i n g ” b u si n es s . In s ho rt , wh en M r. J as i k o ff ex p en d ed$ 1 9 , 8 4 2 fro m J C’ s b an kacco un tt o d efray CFS’ p ayro l l co s t s , J C was n o tp ay i n g i t s o wn ex p en s es . Rat h er, i twas p ay i n g CFS’ ex pen s es , an d p et i t i o n er ad m i t t edth at J C was u n der n o o b l i g at i o n t o d o th i s . Th e ru l e i s wel l es t ab li s h edth ata t ax p ay er s u ch as J C g en eral l y can n o t- 1 6 -

[* 1 6 ] d edu ctth e ex p en s es o f a t h i rdp art y s u ch as CFS. See Dep ut y v . du Po n t , 3 0 8 U.S. 4 8 8 , 4 9 4 (1 9 4 0 ); Read i n g Co . v . Co m m i s s i o n er, 1 32 F.2 d 3 0 6 , 3 1 1 (3 d Ci r. 1 9 42 ). J C’ s v o l u n t ary p aym en ti s b es tch aract eri zedas a cap i t al co n t ri b u t i o n
o r as a g i ftt o CFS m o ti v at edb y p et i t i o n er’ s fri en d s h ip wi t h M r. Zi n n. J C’ s
v o l u n t ary p aym en tt o CFS i s n o ta v al i dp art n ers hi p ex p en s e o f J C t h atco u l dg i ve ri se t o a n etp art n ers h i p l o s s t h atco u l dfl o w th ro u g h t o p et i ti o n er. Th ere i s a n arro wex cep ti o n t o the ru le t h ata t ax p ay er can n o tcl ai m a d edu ct i on fo r p ay i n g a t h i rdp art y ’ s ex p en s es . Th atex cep ti o n ap pl i es wh ere: (1 ) t h e t ax p ay er’ s m o ti v e fo r p ay i n g th e o t h er’ s o b li g at i o n i s t o p ro t ecto r p ro m o t e t h e t ax p ay er’ s o wn b u si n es s an d (2 ) t h e ex p en d itu re i s an “ o rd i n ary an d n eces s ary

ex p en se” o f t he t ax p ay er’ s b u si n es s . Lo h rk e v . Co m m i s s i o n er, 4 8 T.C. 6 7 9 , 6 8 8 (1 9 6 7); Farg o v . Co m

m i s s i on er, T.C. M em o. 2 0 15 -9 6 , at* 2 6 ; Di et ri ckv . Co m m i s s i o n er, T.C. M em o . 1 9 8 8 -1 8 0 , 5 5 T.C.M . (CCH) 7 0 6, 7 1 1-7 1 2 , aff’ d, 8 8 1 F.2 d 3 3 6 (6 th Ci r. 1 9 89 ). Pet i t i o ner d i dn o tcarryh i s b u rd en o f p ro v i n g th atJ C’ s m o t i ve fo r d efray i n g CFS’ p ayro l l ex p en s es was t o p ro m o t e J C’ s o wn b us i n es s . Pet i t i o ner’ s s t ro n g p ers o n al m ot i v at i on fo r h el pi n g M r. Zi n n g reat l y s u g g es t s th at t h i s ad v an ce was a g i ft
o r cap i t al i nv es t m en t, n ot a b u s i n es s ex p en s e. An dCFS’ d i re fi n an ci al s itu at i o n
m ad e i tu n l i k el y

th atJ C wo u ldh av e an o n g o i n g “ m erch an tp ro ces s i ng ” b u s i n es s t o- 1 7 -

[* 1 7 ] p ro m o t e. See Di et ri ck , 5 5 T.C.M . (CCH) at 7 1 1 -7 12 . Becau se p et i ti o n er h as n otes t ab li s h edthatJ C’ s m o t iv e fo r p ay i n g CFS’ ex p en s es was t o p ro t ecto r p ro m o t e i t s o wn b u s i n es s , we n eedn o t ad dres s wh et h er th e ex p en s es were o rd i

n ary an dn eces s ary

ex p en s es o f J C’ s b u s i n es s . W e co n cl u d e t h atp et i t i o n er i s n o t
en t i t l edt o an y

p art ners h i p l o s s d educt i o n fo r 2 0 0 9 b ecau s e h e d i dn o tp ro ve t h e
ex i s t en ce o r am o u n to f s u ch a l o s s . 5 To refl ectthe fo reg o i n g an d t h e co n ces s i o n s o f t h e p art i es , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.

5 Res p o n d en tco n ten d s t h atan y p art n ers h i p l o s s p as s edth ro u g h t o p et i t i o n er fro m J C wo u l db e a “p as s i v e act i v i t y ” l o s s , n o n d edu ct i b l e u n d er s ect io n 4 6 9 (a), b ecau s e p et i ti o n er d i dn ot“ m at eri al l y p art i ci p at e” i n J C’ s t rad e o r b us i n es s . See s ec. 4 6 9(c)(1 )(B). In v i ew o f o u r d i s po s i t i on we n eedn o tad dres s t h i s al t ern at i v e arg u m en t
.