tcmemo_2011_174 united_states tax_court thomas james kaider petitioner v commissioner of internal revenue respondent docket no filed date jonathan p decatorsmith and kristen smith student for petitioner j spencer hitt and mayer y silber for respondent memorandum findings_of_fact and opinion morrison judge respondent the irs issued a notice_of_deficiency for the tax_year to thomas james kaider determining an income-tax deficiency of dollar_figure and a sec_6662 a accuracy-related_penalty of dollar_figure the irs now concedes that kaider’s income-tax deficiency for should be reduced to dollar_figure and that kaider is not liable for the sec_6662 penalty the irs’s initial determination was based on a form 1099-misc miscellaneous income reporting that kaider received dollar_figure of nonemployee compensation in the parties now stipulate that kaider received only dollar_figure of the dollar_figure in the dollar_figure came in the form of four personal checks from his uncle edward quinn quinn at issue is whether the four checks were loans or compensation_for services we find that they were loans findings_of_fact we adopt the stipulation of facts kaider resided in illinois when he filed the petition before kaider’s move to florida kaider suffered a stroke in college leaving him paralyzed from the chest down after college he started pride pavement striping inc quinn lent him dollar_figure for pride pavement striping in which he repaid with interest 1all section references are to the internal_revenue_code as in effect for the year in issue all rule references are to the tax_court rules_of_practice and procedure kaider’s move to florida and his date agreement with quinn in date kaider went to florida for vacation and stayed with quinn the two eventually discussed business and kaider’s computer knowledge impressed quinn who thought those skills could help him with a personal issue and with litigation involving a corporation he co-owned mill-it corp quinn asked kaider to stay in florida and work with him kaider wrote the following letter in response uncle ed this is as concise as i can make it offered services me desired compensation adventure belonging responsibility for important affairs approval of frequent visitation from my loved ones to learn everything you know about business -tommy afterward quinn offered kaider an internship ie a business mentoring opportunity a modified signed version of kaider’s letter the date agreement formalized their 2kaider had only conventional computer skills but quinn was not technologically savvy arrangement kaider decided to stay in florida permanently he lived at quinn’s house until he bought a home in early kaider’s activities in florida from date to date kaider a socialized with family and friends b assisted quinn with his personal affairs c assisted quinn with mill-it by quinn inc which was largely dormant in d assisted quinn with mill-it by kaider-quinn inc which was largely dormant in and e assisted quinn with gym world inc during this time quinn paid kaider’s personal expenses and kaider received the following payments dollar_figure from mill-it by quinn in dollar_figure from quinn in dollar_figure from gym world in and dollar_figure from quinn in at issue is the character of the dollar_figure from quinn in a social activities kaider spent much of his time in florida socializing with family and friends quinn paid most of kaider’s living_expenses and let kaider stay at his house although kaider moved out of quinn’s house in date quinn continued paying kaider’s living_expenses until may or date 3quinn had typed up the letter dated it date and added two signature lines with his and kaider’s names underneath and bearing the heading approved and agreed upon b assistance with quinn’s personal affairs kaider characterized much of his initial activity in florida as trying to wrangle in charlene charlene quinn’s girlfriend and future wife was apparently traveling the country using his credit cards kaider acted as a private investigator checking quinn’s credit card statements and tracking charlene with a global positioning system device this activity continued until charlene’s return in date kaider later helped quinn streamline his personal finances he balanced quinn’s checkbook converted quinn’s financial statements to electronic form and printed financial reports with quickbooks a type of accounting software kaider testified that he usually printed the quickbooks reports once a month and added a simple coversheet with some clip art over to months he spent hour and minutes compiling the reports it seems quinn was extremely pleased he testified that the reports were very nicely done graphs charts showing good workmanship and splitting out different things but after examining the reports we do not believe they required much skill or effort kaider also helped quinn manage daily household expenses for example he ensured that checks reached their intended 4the first report took about hour because kaider had to enter in the baseline data which he did while watching tv later it took literally seconds each to produce new reports he merely entered updated numbers and printed the report recipients and were properly recorded and he supervised workers renovating or repairing the house kaider estimated that he spent minutes every other day assisting quinn with various tasks we believe this assistance extended into c mill-it corp and mill-it by quinn inc several decades ago quinn started mill-it corp which recycled roads and runways he later brought in two partners guzman and bortells to help run the company in date quinn started mill-it by quinn inc with his children--eddie quinn eddie and kacey quinn kacey he envisioned it as a business similar to mill-it corp but mill-it by quinn did not engage in significant operations in and much of its work consisted of conversations between quinn eddie and kacey around date eddie and kacey had a falling out with quinn and left the company in quinn’s mill-it corp partners guzman and bortells sued over quinn’s right to use the name mill-it by quinn among other issues quinn testified that the litigation severely hindered mill-it by quinn’s operations because a court order prevented him from using the name mill-it by quinn 5if quinn paid kaider’s living_expenses in exchange for his assistance kaider may have had additional unreported income the irs did not raise this issue so we do not address it 6the company ground road materials into small nuggets--a process called milling--then melted and reprocessed the nuggets before laying the recycled materials in roads quinn finally prevailed in late and mill-it by quinn was operating at the time of trial to help with the lawsuit kaider prepared a three-page graphical representation using mill-it corp ’s tax returns from to the compilation showed the company’s income during that period and detailed the three partners’ earnings its purpose was to show that quinn had been fair and had given his partners a very healthy salary the document was ultimately used in the litigation it took kaider eddie and kacey hours to make the compilation on one day in date kaider also assisted with mill-it by quinn’s startup activities he helped design a logo a business card and a t-shirt he taught eddie and kacey how to use quickbooks and he attended a function at the roadbuilders association which he described as a volleyball eating drinking sort of event the parties stipulated that mill-it by quinn paid kaider dollar_figure in wages in this payment was recorded on a paystub there were no paystubs for 7another paystub reflects a second dollar_figure wage payment to kaider but other evidence suggests that he did not receive the second dollar_figure thus we do not disturb the stipulation that kaider received only dollar_figure in wages from mill-it by quinn in d mill-it by kaider-quinn inc in date kaider quinn eddie and kacey started mill-it by kaider-quinn inc quinn anticipated that the company would secure disadvantaged-business-enterprise status on the basis of kaider’s disability procure contracts from the state of florida and subcontract work to mill-it by quinn however the company never began operations as kaider testified the business idea was the product of a one-day conversation and the company never did anything when quinn eddie and kacey had their falling out quinn asked kaider to continue mill-it by kaider-quinn with him kaider refused he was not interested in milling and did not want his cousins to hate himdollar_figure e gym world inc for years quinn exercised at a gym operated by turner health fitness inc quinn had lent the company over dollar_figure and had developed some sort of partnership arrangement with it by 8the stipulation of facts incorrectly states that the articles of incorporation for mill-it by kaider-quinn were filed on date the articles were actually filed on date 9on date kaider amended mill-it by kaider-quinn’s articles of incorporation to remove quinn eddie and kacey as officers the record does not explain the reason for or significance of doing so 10the timeline of events for mill-it by kaider-quinn is unclear quinn’s involvement with the company may have ended when kaider removed him as an officer see supra note or when his falling out with eddie and kacey occurred in date quinn and kaider ousted mike turner the president of turner health fitness from gym operations quinn gave turner’s responsibilities to kaider who worked at the gym for to days quinn formed gym world inc to take over the gym and it paid kaider dollar_figure in wages in which it reported on a form_w-2 wage and tax statement despite the successful removal of mike turner gym world faced insurmountable problems it had trouble succeeding to leases membership agreements and rights to membership fees the gym rapidly lost money quinn paid its operating_expenses for a while but eventually abandoned the venture quinn was deeply dissatisfied with kaider over the episode f the alleged loans from quinn i the checks from to kaider received checks from quinn totaling dollar_figure date check no amount dollar_figure big_number big_number big_number big_number big_number big_number big_number total big_number big_number big_number 1the stipulation of facts incorrectly lists date as the date of this check all checks were signed by quinn and drawn from quinn’s personal checking account the first three checks july august and date were handwrittendollar_figure the other seven checks were computer-generated except for quinn’s signature using a template that kaider designed the word loan was in the memo line of all checksdollar_figure kaider deposited each check into his personal bank account ii the loan agreements the record contains loan agreements between kaider and quinn the dates and amounts on the loan agreements correspond to the checks that quinn gave kaider from to dollar_figure each loan agreement provided that quinn would lend kaider the amount stated on the corresponding check pincite percent annual interest and that the full amount plus interest would be due 11a handwritten check refers to a standard preprinted check that was filled in by hand loan was handwritten on the handwritten checks and typewritten on the computer-generated checks 13the loan agreements were sometimes dated the same day as the corresponding check sometimes before and sometimes after each loan agreement was typically dated within a few days of the corresponding check with the largest gap being days five years from the date of the agreementdollar_figure each loan agreement also provided that the debt could be paid partially or fully at any time without penalty and that the agreement could be renewed at the discretion of quinn and kaider all loan agreements in the record bear kaider’s signature but only the date agreement contains both men’s signaturesdollar_figure g the rift with quinn and the date fax around date family members held an intervention to break quinn’s drug habit kaider’s refusal to participate in the intervention upset quinn on date quinn sent the following fax to kaider tommy this can be subjective but in reality you’re fired but i am your uncle and i love you please release all my data passwords and information computers copiers files etc in tact sic do not lose any information during transition or transport if needed i can supply an enclosed environmentally friendly trailer 14there is one exception the loan agreement dated date uses the date of the check not the date of the agreement to determine the due_date for repayment thus the agreement states that repayment is due on date--five years from the date of the check 15the irs disputes that quinn signed the date loan agreement we find that he did first the signature on the agreement is similar to quinn’s signature on other documents second kaider testified that the signature was quinn’s he recognized the signature because he had seen quinn’s checks when he helped manage quinn’s household expenses see supra pt b quinn testified that he did not sign the date loan agreement but we do not believe him with generator and backup power support to prevent any loss of data and information edward t quinn signed kaider interpreted the fax to mean he was relieved of his duties at the gym he stopped working there and ceased contact with quinn for the rest of his time in florida kaider paid his living_expenses with a combination of leftover money from quinn and income from various side jobsdollar_figure he moved back to illinois in late the form 1099-misc in mill-it by quinn filed a form 1099-misc with the irs the form reported that mill-it by quinn paid kaider dollar_figure--the sum of the loan checks--in nonemployee compensation in it is unclear how the form 1099-misc came to be filed quinn testified that he did not know who had filed the form kaider testified that he was not aware of the form until the irs audited his return mill-it by quinn’s tax_return mill-it by quinn filed a form_1120s u s income_tax return for an s_corporation for it did not claim deductions for wages officer compensation or nonemployee compensation it did not deduct or otherwise report the dollar_figure of nonemployee compensation reported on kaider’s form 1099-misc 16kaider did not report the income from his side jobs on his tax_return the irs does not assert that kaider is taxable on this income quinn expressed dissatisfaction with kaider over mill-it by quinn’s tax_return even though kaider no longer worked for quinn when the return was filed quinn testified that he paid kaider eddie and kacey for services rendered to mill-it by quinn he declared that kaider’s form 1099-misc was not a proper and that he was working on filing proper form 1099s and amended tax returns for and that would reflect the payments to kaider eddie and kacey kaider’s tax_return kaider filed a form_1040 u s individual_income_tax_return for he reported dollar_figure in wages from gym world he did not report any income from quinn mill-it by quinn or mill-it by kaider-quinn he did not report the dollar_figure in checks he received from quinn in opinion i the parties’ positions from to kaider received checks from quinn totaling dollar_figure four of the checks--totaling dollar_figure--were received in dollar_figure none of the four checks were reported on kaider’s tax_return the irs claims that the four checks were compensation_for services to mill-it by quinn and should 17quinn testified that the form 1099-misc was improper because it was unauthorized and because mill-it by quinn never claimed a deduction for the dollar_figure reported on the form 18the irs concedes that the other six checks--totaling dollar_figure--were received in a year not in issue have been included in income kaider asserts that the checks were loans from quinn and thus not includable in income ii burden_of_proof generally the taxpayer has the burden of proving the irs’s determination of deficiencies incorrect rule a 290_us_111 in some instances sec_7491 imposes the burden_of_proof on the irsdollar_figure kaider argues that the irs has the burden of proving the checks were not loans because he claims he introduced credible_evidence that the checks were loans we do not address the allocation of the burden_of_proof because as we explain we find that kaider has shown by a preponderance_of_the_evidence that the four checks totaling dollar_figure were loansdollar_figure iii whether the four checks totaling dollar_figure were loans or compensation_for services the taxability of the checks depends on whether they were loans or compensation_for services compensation_for services is included in gross_income sec_61 money received under a loan however is not included in gross_income because it is sec_7491 imposes the burden_of_proof on the irs for a factual issue affecting tax_liability if the taxpayer introduces credible_evidence regarding the issue meets substantiation and recordkeeping requirements and cooperates with reasonable requests from the irs see 116_tc_438 20the irs has conceded that it has the burden of production see sec_6201 we need not determine whether the irs has satisfied its burden offset by an obligation to repay 461_us_300 a bona_fide loan exists only if both parties have an actual good_faith intent to establish a debtor-creditor relationship when the funds are advanced 54_tc_905 55_tc_85 an intent to establish a debtor-creditor relationship exists if the debtor intends to repay the loan and the creditor intends to enforce repayment fisher v commissioner supra pincite beaver v commissioner supra pincite courts consider various factors to determine whether parties intended a bona_fide loan no single factor is dispositive see eg 204_f3d_1228 9th cir affg tcmemo_1998_121 925_f2d_180 7th cir affg tcmemo_1989_393 in determining whether the checks were loans we examine the following factors as evidence of quinn and kaider’s intent the ability of the borrower kaider to repay the existence or nonexistence of a debt_instrument security_interest a fixed repayment date and a repayment schedule how the parties’ records and conduct reflect the transaction whether the borrower has made repayments whether the lender quinn has demanded repayment the likelihood that the loans were disguised compensation_for services and the testimony of the purported borrower and lender see welch v commissioner supra pincite1 ability to repay existence of instrument security_interest repayment schedule actual repayments demands for repayment parties’ records and conduct and testimony of purported borrower considered in determining whether unexplained bank_deposits were loans or taxable_income frierdich v commissioner supra pincite ability to repay existence of instrument security_interest repayment date repayment schedule actual repayments likelihood that loans were disguised compensation and testimony of purported borrower considered in determining whether a lump-sum payment was a loan or an advance of attorney’s fees mann constr co v commissioner tcmemo_1999_183 listing factors considered including demands for repayment and parties’ records in determining whether advances made to the son of a close corporation’s president were bona_fide debt for purposes of a sec_166 bad_debt deduction a the ability of the borrower to repay if the borrower was unable to repay when the funds were advanced it suggests that the parties did not intend a bona_fide loan see eg 321_f2d_598 3d cir affg 36_tc_446 courts assess the borrower’s ability to repay by evaluating whether there was a reasonable expectation of repayment in light of the economic realities of the situation fisher v commissioner supra pincite the irs analogizes kaider’s situation to that of the taxpayer in fisher who was insolvent when the funds were advanced the taxpayer in fisher owed another private creditor nearly dollar_figure he had federal tax_liens of dollar_figure outstanding against him the mortgage on his home had been foreclosed and his only assets consisted of furniture valued at dollar_figure and an insubstantial amount of cash id pincite the court found there was no reasonable expectation of repayment id pincite in kaider had few assets and he had substantial debts a dollar_figure home mortgage by his estimate a dollar_figure previous debt to quinn assuming the six checks in were loans and a dollar_figure overdraft protection line of credit on which he owed varying amounts each month he also had no reliable source of future earnings however kaider and quinn reasonably expected that some of quinn’s startup enterprises would become profitable and enable kaider to repay his loans within a five- year perioddollar_figure quinn had told kaider we’re going to get something going down here and you’re going to have all the money 21kaider’s obligation to repay was not contingent on the success of a startup enterprise in mann constr co v commissioner tcmemo_1999_183 we held that a son had valid and enforceable debt when he borrowed money from his father’s company which had claimed a sec_166 bad_debt deduction even though the son expected to repay primarily through future employment with the company his obligation to repay was not limited to his future earnings from the company id in the world and you can pay me back the delays in starting mill-it by quinn and the failure of mill-it by kaider-quinn did not render the expectation unreasonable quinn a self-made millionaire had already proven himself a successful entrepreneurdollar_figure b the existence or nonexistence of a debt_instrument the existence of a debt_instrument suggests that the parties intended a bona_fide loan see eg frierdich v commissioner supra pincite 52_tc_255 affd 422_f2d_198 5th cir the record contains copies of the loan agreements between kaider and quinn copies of nine agreements are signed by kaider but not by quinn a copy of the 10th agreement dated date is signed by both kaider and quinn the irs contends that the loan agreements do not show an intent to establish bona_fide loans because they were not signed by quinn making them unenforceable under florida law they were not notarized and recorded and they were not negotiated the irs’s arguments present factual questions about whether quinn signed the agreements and whether negotiation sec_22the failure of gym world is irrelevant because kaider did not work at the gym until after he received the checks see 54_tc_905 borrower’s ability to repay evaluated on basis of circumstances when funds were advanced supra pts e and f i occurred to resolve these issues we must resolve the conflicting testimonies of kaider and quinn kaider’s testimony kaider testified that the loan agreements arose from periodic discussions in which he told quinn that he hoped to buy out his partner in pride pavement striping buy a new house or pay his home mortgage during those discussions quinn would offer to lend kaider money pull up a template loan agreement23 on the computer and fill in the blanks the amount of each loan was determined by kaider’s needsdollar_figure kaider said he did not negotiate the terms of the loan agreements besides the amount after he and quinn agreed on an amount they would print two copies of the agreement and sign itdollar_figure but kaider was confused why nine agreements in evidence lacked quinn’s signature quinn’s testimony quinn testified that the checks were payments for kaider’s services although he was aware of the loan agreements he testified that he did not draft or sign these loan agreements or 23quinn’s template loan agreement was family folklore kaider testified that quinn always used the same loan agreement regardless of the situation the template loan agreement provided for a five-year loan pincite percent annual interest 24the default amount in the template was dollar_figure 25the signing of the agreements was memorable because quinn insisted that they both sign in blue ink it was another one of uncle ed’s legends that black ink is not legal and you have to sign in blue any other loan agreements with kaider from to quinn declared that he would not have lent money for a five-year term if he had lent money to kaider the term of the loan would have been less than a year because it was improper for a small company to lend that kind of money especially to family quinn’s five-year loan agreement with turner health fitness however contradicts his testimony that he did not lend money for terms over a yeardollar_figure in fact quinn’s later testimony revealed that he had signed or loan agreements with turner health fitness that involved terms exceeding one year when asked whether he had executed loan agreements with other organizations involving terms longer than a year quinn became evasive resolution we find that kaider and quinn entered into written loan agreements corresponding to each of the checks kaider received of the loan agreements the date agreement is the only 26quinn believed only banks and mortgage companies should provide long-term loans 27on date quinn entered into a written_agreement with turner health fitness inc to lend the company dollar_figure pincite percent annual interest with the full amount plus interest due five years from the date of the agreement the turner health fitness agreement the turner health fitness agreement is nearly identical in language and in format to the loan agreements with kaider the only significant differences are the amount lent and the slightly lower interest rate percent instead of percent the turner health fitness agreement was signed by quinn as president no entity stated and mike turner as president of turner health fitness inc it was notarized and recorded at the circuit_court of seminole county florida agreement in evidence that has quinn’s signature see supra note and accompanying text however kaider testified credibly that he and quinn had signed all the agreements quinn testified that he did not sign the agreements and would not have lent money for terms over a year but we do not believe him first quinn was not a credible witnessdollar_figure second his testimony that he did not sign any agreements was not believable given that the date agreement had his signature third the five-year loan to turner health fitness and or similar loans indicates that he did lend money for terms longer than a year the lack of notarization and recording does not detract from the loan agreements’ evidentiary weight as we stated in zohoury v commissioner t c memo intra-family loans are many times informal arrangements which may not comply with all of the customary legal formalities that would surround a commercial loan see also barton v commissioner tcmemo_1979_234 93_fsupp_935 d del we reject the irs’s contention that the loan agreements were not negotiated kaider and quinn negotiated the amount of each loan and although the agreements followed quinn’s template we 28quinn’s testimony was generally inconsistent for example quinn testified that kaider drafted the turner health fitness agreement and that the terms were totally inappropriate the bottom of the agreement however states this document was prepared by edward t quinn believe kaider agreed with the terms thus the agreements were the product of bargaining we conclude that the loan agreements show an intent to create a debtor-creditor relationship c security_interest a fixed repayment date and a repayment schedule security_interest a fixed repayment date and a repayment schedule suggest that the parties intended a bona_fide loan see eg welch v commissioner f 3d pincite1 frierdich v commissioner f 2d pincite a lack of security a low interest rate and an open-ended repayment date suggest otherwise frierdich v commissioner supra pincite the agreement provisions show an intent to establish bona_fide loans for each loan kaider agreed to pay percent annual interest and adhere to a fixed repayment date given the intrafamily context we find the low interest rate and the lack of security insignificant see zohoury v commissioner supra barton v commissioner supra d how the parties’ records and conduct reflect the transaction if the parties treated the transaction as a loan it suggests that they intended a bona_fide loan see eg 284_f2d_928 7th cir affg tcmemo_1959_225 mann constr co v commissioner tcmemo_1999_183 schiffgens v commissioner tcmemo_1984_137 the checks each had loan in the memo line kaider testified that quinn wrote loan on the handwritten checks and approved the addition of loan to the computer-generated checks before signing them quinn testified that kaider added loan to each check after quinn had signed them we believe kaider quinn was aware that kaider was depositing the checks and that kaider thought they were loans yet he did not explain why if he thought the checks were not loans he failed to correct kaider’s impression that they were loans we also do not find quinn a credible witness generally see supra note and accompanying text the fact that the checks were drawn from quinn’s personal bank account further confirms that they were personal loans and not compensation from mill-it by quinn quinn testified that a court order prevented him from opening a bank account in mill-it by quinn’s name and that for this reason he paid the company’s expenses from his personal bank account but bank records reveal that quinn opened a bank account in mill-it by quinn’s name and used it to pay the company’s expenses two bank statements show payments for roughly dollar_figure in expenses from july to date also mill-it by quinn did not deduct the checks as compensation on its tax_return which is consistent with the checks being loans in sum kaider and quinn treated the checks as loans e whether the borrower has made repayments if the borrower has made repayments it suggests that the parties intended a bona_fide loan see eg welch v commissioner supra pincite frierdich v commissioner supra pincite this factor is neutral by the time of trial kaider had not made repayments but none of the loans were due f whether the lender has demanded repayment a demand for repayment suggests that the parties intended a bona_fide loan see eg estate of rosen v commissioner tcmemo_2006_115 mann constr co v commissioner supra this factor is neutral by the time of trial quinn had not demanded repayment but no payments were due quinn testified that when he advanced the funds he did not intend to enforce repaymentdollar_figure but we do not believe him g the likelihood that the loans were disguised compensation_for services there is no evidence that the checks were disguised compensation_for services see frierdich v commissioner supra pincite finding that purported loan was disguised advance_payment of attorney’s fees any uncompensated services that kaider rendered to quinn mill-it corp or mill-it by quinn were insignificant compared to the amount of money he received from the 29quinn testified that he never intended to demand repayment of the amounts because they were payroll loan checksdollar_figure characterizing the checks as compensation_for services would mean that kaider received dollar_figure for hour and minutes of making quickbooks reports hours of preparing the mill-it corp compilation day of discussing mill-it by kaider-quinn and minutes every other day of assisting quinn with miscellaneous tasksdollar_figure kaider already received dollar_figure in wages from mill-it by quinn an amount which at least partially covered his assistance with the company’s startup activities-- designing a logo a business card and a t-shirt showing eddie and kacey how to use quickbooks and attending the event at the roadbuilders associationdollar_figure two other facts make it more likely that the checks were loans quinn lent kaider dollar_figure in which kaider repaid and quinn paid most of kaider’s living_expenses in florida 30in fisher v commissioner t c pincite we concluded that the taxpayer’s services were worth more than his stated salary we held that the purported loans from his employer were compensation_for services 31kaider testified that he and quinn agreed to no compensation when signing the date agreement the internship offer when the loan agreements arose kaider did not ask to be paid for the miscellaneous tasks because he was just eating quinn’s food and going through the dvd’s the work maybe amounted to minutes every other day of him ie quinn just saying well can you help me with this aspect of something to do with his e-mail account 32kaider’s dollar_figure in wages from gym world sufficiently compensated him for hi sec_35 to days at the gym we thus ignore this work in evaluating what services the dollar_figure may have covered h the testimony of the purported borrower and lender courts consider the testimony of the parties to a transaction in determining whether they intended a bona_fide loan see frierdich v commissioner f 2d pincite kaider testified that he and quinn intended the checks to be loans he said that he intended to repay quinn and that when quinn gave him the checks quinn said you bet you’re going to pay it back quinn on the other hand testified that the checks were compensation_for the various services that kaider rendered to him personally to mill-it corp and to mill-it by quinndollar_figure according to quinn kaider proposed that quinn pay him dollar_figure a month and quinn agreeddollar_figure kaider’s testimony that the checks were loans is supported by objective evidence the ability to repay the checks with loan in the memo line the loan agreements corresponding to the checks the fixed interest rate the fixed repayment dates and the improbability that the checks were disguised compensation_for services to the extent quinn’s testimony contradicts kaider’s we do not find quinn credible 33quinn did not distinguish among his companies in his mind he viewed kaider’s employer as edward quinn mill-it corp and mill-it by quinn in the aggregate 34quinn testified that the dollar_figure check dated date consisted of kaider’s monthly compensation plus moving_expenses quinn did not testify about the dollar_figure check dated date we conclude that kaider received dollar_figure in bona_fide loans in the year in issue kaider and quinn had an actual good_faith intent to establish a debtor-creditor relationship when kaider received the checks therefore the dollar_figure is not includable in kaider’s income to reflect the foregoing decision will be entered under rule


tax_exempt_and_government_entities_division release number release date uil code department of the treasury internal_revenue_service te_ge eo examination sec_1 commerce street mc 4920dal dallas tx pate may taxpayer_identification_number person to contact employee identification_number employee telephone number certified mail -return receipt requested dear a is final adverse determination_letter as this to your exempt status under sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked effective january 20xx our adverse determination was made for the following reasons you have not demonstrated that you are operated exclusively for exempt purposes within the meaning of sec_501 of the internal_revenue_code and sec_1 c -1 exempt clubs are organized for pleasure recreation and other non-profitable purposes the exemption extends to social and recreation clubs that are supported solely by membership fees dues and assessments our examination of your activities and finances revealed that your operations are supported primarily with funds other than from your members therefore you are not operating in furtherance of or exclusively for pleasure recreation or other similar nonprofit purposes as defined under sec_501 of the code you are required to file federal_income_tax returns on form_1120 if you have not already filed these returns and the agent has not provided you instructions for converting your previously filed form_990 to form_1120 you should file these income_tax returns with the appropriate service_center for the tax_year ending december 20xx and for all tax years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a petition or complaint in one of these three courts must be filed before the st day after the date this determination was mailed to you if you wish to seek review of our determination please contact the clerk of the respective court for rules and the appropriate forms regarding filing petitions for declaratory_judgment by referring to the enclosed publication please note that the united_states tax_court is the only one of these courts where a declaratory_judgment action can be pursued without the services of a lawyer you may write to the courts at the following addresses united_states tax_court second street nw washington dc us court of federal claims madison place nw washington dc u s district_court for the district of columbia constitution ave n w _ washington dc the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit taxpayeradvocate irs gov or call if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours maria hooke director exempt_organizations examinations enclosures publication department of the treasury internal_revenue_service tax exempt and government entities tna exempt_organizations examinations irs dollar_figure commerce street dallas texas certified mail- return receipt requested dear date taxpayer_identification_number form tax_year s ended december 20xx person to contact id number employee id contact numbers telephone fax manager's name 1d number employee id manager's contact number response due_date why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren't an organization described in sec_501 if we don't hear from you if you don't respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also letter rev catalog number 34809f may file a protest with the irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn't apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn't a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate letter rev catalog number 34809f t b for additional information if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely maria hooke director eo examinations enclosures report of examination form_6018 publication publication letter rev catalog number 34809f form 886a deparin pthe explanation of items iylornal revenue servies eacurs year period ended name of taxpayer 20xx12 issue should the c of the internal_revenue_code continue to qualify as an organization described in facts during the review of the cash receipts journal general ledger and other taxpayer related records it has been noted that that total income for non-member bar sales and green fees in the previous year the organization received about the same percentage of income from these activities and was well above the non-member threshold outlined in public law received dollar_figurexxx xxx xx or xx if ts from a discussion with president it did not appear that the facts and circumstances would change significant enough for the organization to receive a substantial amount of income from its mem bership in the foreseeable future although the current tax_year is not due the non-member percentage will stay around the same for this tax_year as well as a result over a year average the organization has exceeded the threshold as outlined by the committee reports in public law law internal_revenue_code sec_50i c describes organizations organized and operated exclusively for social pleasure and recreational purposes and no part of the net_earnings of which inures to the benefit of any private shareholder internal_revenue_code sec_512 discusses special rules applicable to organizations described in paragraph and of sec_501 the term unrelated_business_income means the gross_income excluding any exempt_function_income less the deductions allowed by this chapter exempt_function_income for purposes of this sub-section means the gross_income from dues fees charged or similar amounts paid_by members of the organization or consideration for providing goods and services in furtherance of the purposes constituting exemption public law amended sec_501 to reflect a two-fold change under irc first it made it clear that c organizations may receive some investment_income without losing its exemption second it permits a higher level of non-member use of club facilities form a rev department of the treasury - internal_revenue_service page -1- form 886a epant name of taxpayer trcasars - internal revenue savies natof ibs i explanation of items year period ended 20xx12 public law defines gross_receipts as those receipts from normal and usual activities of a club including charges admission fees membership dues fees assessments investment_income but excluding initiation fees and capital contributions public law also states that it its intended that social clubs can receive up to of its gross_income from investments from outside sources of their memberships without losing its tax-exempt status and up to of its income cannot be received from the general_public internal_revenue_code sec_277 requires mem bership organizations to file form_1120 that do not include membership losses on form_1120 taxpayer's positon the taxpayer has agreed to the revocation the taxpayer has received xx of its income from non-members in tax years ending december 20xx and december 20xx and exceeds the threshold revocation of the organization's tax exempt status is warranted the effective date of revocation is january 20xx please sign form_6018 agreeing to the revocation of the organization's exempt status also see attached spreadsheet reflecting how the form_1120 should be prepared see instructions to form_1120 to determine how depreciation should be calculated ifanother form of depreciation such as macrs is used the loss may be a little higher than in this calculation which may cause continuous losses government's positon conclusion form 886-a rev department of the treasury - internal_revenue_service page -2-