Opinion ID: 782888
Heading Depth: 2
Heading Rank: 4

Heading: George Washington Painting

Text: 73 In 1980, Kanter was approached by Richard Feigen, a client, who wanted help in securing funding to buy a painting of George Washington located in England that Feigen believed to be by John Trumbull. 22 Kanter put Feigen in touch with another client, Mr. Rappaport, 23 in Switzerland, who agreed to finance the purchase of the painting. The transaction closed. After the purchase, the painting was discovered not to be a Trumbull, and the seller agreed to rescind the sale. As a result of exchange rate and interest rate changes, Rappaport, who had advanced the funds, lost money. Rappaport wanted to be made whole, and when rebuffed, threatened to sue Feigen and Kanter for his claimed loss. Kanter, in convincing Feigen to reimburse Rappaport, agreed to provide $94,231 of his own funds. Kanter also paid $10,000 in legal fees incurred throughout the course of the transaction. 74 On his 1980 tax return, Kanter claimed the sum of $104,231 as a deduction on Schedule C, stating that his main business activity was buying and selling paintings. The IRS disallowed the claimed loss. The Tax Court found, based on Kanter's testimony, that Kanter's main occupation was as an attorney and that he did not hold himself out as an art expert or art dealer. This made the claimed deduction unrecognizable under 26 U.S.C. § 162 as an ordinary and necessary business expense. Additionally, the Tax Court did not allow this deduction as a § 212 expense for production of income because Kanter received no fees and no contract existed therefor, [and so] the expenditure did not bear a reasonable and proximate relationship to the production of income. IRA, 78 T.C.M. (CCH) at 1121. [Kanter] merely served as an intermediary to introduce Feigan to another friend, Rappaport. There was no written contract between Feigan and Kanter for the sharing of profits. Id.
75 The Commissioner's determination that Kanter's expenses associated with the failed sale of the Washington painting were not legitimate deductions under 26 U.S.C. §§ 162 and 212 is a finding of fact that we review for clear error. Reynolds v. Comm'r, 296 F.3d 607, 615 (7th Cir. 2002); Buelow v. Comm'r, 970 F.2d 412, 415 (7th Cir.1992). 76 The Tax Court found, essentially, that Kanter could not deduct the expenses under §§ 162 and 212 because Kanter's business was the practice of law, not art, and there was no evidence that Kanter had an agreement with Feigen to receive fees or share profits from the purchase and planned resale of the painting. The Tax Court simply did not believe the self-serving and uncorroborated testimony of Kanter. IRA, 78 T.C.M. (CCH) at 1121. Given the totality of the Tax Court's findings that Kanter systematically engaged in extensive (non-law related) business dealings whereby he entered into arrangements pursuant to which he would use his... contacts ... to assist individuals ... in obtaining business opportunities or in raising capital for business ventures[,] we find it implausible for the Tax Court to conclude that Kanter was not engaged in such dealings when he helped Feigen secure financing from Rappaport. IRA, 78 T.C.M. (CCH) at 970. 77 Without excessively detailing the transactions relating to the Five that we summarized in Part II, we note that the Tax Court's opinion went to considerable lengths to confirm deficiencies against Kanter based on a characterization of Kanter's business as ranging far beyond the simple practice of law. In each of the transactions involving the Five, the foundation for the Tax Court's determination that Kanter consistently understated his income was its findings that time after time Kanter provided non-legal business services in facilitating business opportunities for the Five with Prudential, and that he was paid handsomely for that facilitation. It is difficult for us to read the first few hundred pages of the Tax Court's opinion and not be left with the distinct impression that the Tax Court believes Kanter was involved in this business activity with continuity and regularity and... [his] primary purpose for engaging in the activity [was] for income or profit. Comm'r v. Groetzinger, 480 U.S. 23, 35, 107 S.Ct. 980, 94 L.Ed.2d 25 (1987). At the very least, Kanter has shown a distinct proclivity to seek income and profit through activities similar to the failed sale of the painting. 78 Determining whether an activity was engaged in for profit requires an examination of the relevant factors outlined in Treasury Regulation 1.183-2. See 26 C.F.R. § 1.183-2; Burger v. Comm'r, 809 F.2d 355, 358 (7th Cir.1987). The nine factors for determining whether Kanter's involvement in the sale of the George Washington painting was carried on for profit include: (1) the manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) elements of personal recreation or pleasure in carrying on the activity. 26 C.F.R. 1.183-2(b). 79 We can, based on Kanter's testimony and considering the Tax Court's other findings, construct a highly probable scenario under which Kanter was to find financing for Feigen's purchase in exchange for part of the anticipated profits. Under factor (1), this manner of doing business, while not well documented, is consistent with the method pursued in other transactions detailed by the Tax Court. Under factor (2), Kanter's apparent expertise in facilitating financing transactions and putting people together for deals in order to generate income was so evident to the Tax Court that it found him liable for large underpayments of income tax. Additionally, Kanter has indicated that the art project was attractive because of Feigen's expertise in generating sufficient publicity and excitement about artwork to likely increase the resale price, thus satisfying factor (4). (Tr. at 4416-30.) Regarding factor (5), Kanter's obvious success in other facilitation-of-business ventures was what landed him in trouble with the Commissioner in the first place. An appealing tale of the Washington painting scheme as a failed for-profit venture emerges from this evidence. In fact, while there is significant evidence that Kanter undertook similar, though not identical, transactions as the failed painting purchase for profit, there is no evidence that Kanter facilitated any other deals of this kind for personal reasons (i.e., gratuitously). And the Commissioner presents no evidence contradicting Kanter's version of events. In fact, by asserting that, in all of his other disputed transactions in which income was produced, Kanter had participated in the manner alleged here and with the kind of profit motive he alleges here, but arguing that in this single transaction, where losses were generated, Kanter participated for only personal reasons, the Commissioner appears to want to have his cake and eat it too. 80 There are certain difficulties in reversing the Tax Court here. We would have to reverse the Tax Court's credibility finding on the matter. In that connection, neither Feigen's testimony, nor Rappaport's testimony, nor any piece of specific evidence exists in the record to support Kanter's testimony. And we have found elsewhere that, while a taxpayer's uncontradicted testimony was sufficient to demonstrate that the Commissioner's determination was erroneous, the Tax Court can disregard that testimony if it is not credible. Lerch v. Comm'r, 877 F.2d 624, 631 (7th Cir.1989). The Tax Court did not here believe Kanter's claim of a profit motive. While finding Kanter not credible in this instance is consistent with the Tax Court's refusal to find him credible on other issues, it results in a completely inconsistent and implausible factual scenario — Kanter's incurring more than $100,000 in expenses gratuitously to facilitate a business transaction where huge potential profits lie. But without any indication why this transaction is unique among all the other Kanter activities, we think the Tax Court was clearly erroneous in rejecting Kanter's claim that he was pursuing commercial objectives here as elsewhere. 81 In conclusion, we find that there must have been a profit motive in Kanter's involvement in the aborted purchase of the George Washington painting; the Tax Court's finding to the contrary is clearly erroneous and we reverse. Kanter's deduction for the $104,231 of expenses incurred in facilitating the failed sale of the George Washington painting is allowed.