Court Opinion

ID: 9839117
Source: CourtListenerOpinion
Date Created: 2023-09-11 19:02:48.280812+00
Date Added: 2024-06-11T09:12:19.508163
License: Public Domain

United States Tax Court

                         T.C. Memo. 2023-114

                   SHORT STOP ELECTRIC, INC.,
                           Petitioner

                                   v.

            COMMISSIONER OF INTERNAL REVENUE,
                        Respondent

                              —————

Docket No. 11359-20.                         Filed September 11, 2023.

                              —————

Thomas Edward Brever, for petitioner.

Lisa R. Jones and Christina L. Cook, for respondent.

       MEMORANDUM FINDINGS OF FACT AND OPINION

       HOLMES, Judge: Short Stop Electric is an electrical contractor
mostly owned by its president, Bob Boyum. Since 2009 he has extended
to his company what he calls a “revolving line of credit.” In 2015 and
2016, Short Stop did not actually borrow money from, or pay interest to,
Boyum. Boyum instead increased the principal of the loan by the
amount of interest that he said the company owed him. Short Stop
recorded the interest as paid even though the corporation uses the cash
method of accounting.

      The Commissioner was shocked to discover what was going on
and resists the characterization of these accounting entries as
deductible interest payments. He charges as invalid Short Stop’s net
operating losses (NOLs) that flowed from these interest payments. He
challenges deductions that the company claimed for its purchase of
several depreciable assets. And he wants penalties as well.

                           Served 09/11/23
                                            2

[*2]                           FINDINGS OF FACT

I.      Short Stop’s Business and Accounting

       Short Stop Electric sells commercial, industrial, and residential
electric services. Its owners, Boyum and his wife Michelle, incorporated
it in Minnesota back in 1989. At the time of incorporation, and through
the tax years at issue, Bob owned 96% of the stock and Michelle owned
the rest. Bob is president of the company and handles the “bidding,
billing, pricing, [and] acquiring material[s].” Michelle helped where she
could with administrative duties, payroll, and deliveries but, as Bob
credibly testified, her primary focus was raising the nine Boyum
children.

        Boyum chose to have Short Stop be a C corporation under the
Code. 1 He also chose to adopt the cash method of accounting. 2 One might
regard this as an eccentric choice for a small, privately owned business
because income from C corporations is taxed twice. See, e.g., Pierre v.
Commissioner, 133 T.C. 24, 30 (2009), supplemented by 99 T.C.M. (CCH)
1436 (2010). The Code taxes it first at the corporate level as corporate
income. And then when a C corporation distributes anything that’s left
to its shareholders, they must themselves include the dividend in their
own taxable income.

       Small-business owners understandably want to insulate
themselves from this aspect of the tax system. The most popular ways
to do so are to elect to be taxed under subchapter S of the Code, 3 or to
organize as a limited liability company (LLC) and choose to be taxed as

        1 A “C corporation” is a corporation that is taxed under subchapter C of
chapter 1 of the Code, §§ 301–385. (All section references are the Internal Revenue
Code in effect for the years in issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure, unless we say otherwise.)
        2 A cash-basis taxpayer recognizes income in the year that it actually receives

that income. It must likewise deduct its expenses in the year in which it pays them.
Treas. Reg. § 1.446-1(c)(1)(i). In contrast are accrual-method taxpayers who recognize
income and deduct expenses in the year in which the event occurs that secures them
either the right to that income or the obligation to make that payment. See id.
subdiv. (ii).
        3 If a business satisfies the requirements of section 1361, it may elect to become

an “S corporation” and in turn avoid paying corporate tax. Unlike a C corporation, an
S corporation’s income and losses are treated like that of a partnership. § 1366. They
flow through to the shareholders directly and therefore avoid the first level of double
taxation.
                                          3

[*3] a partnership or a sole proprietorship. 4 Choosing to become an
S corporation or an LLC means no tax at the corporate level, but this
case is about how Short Stop and Boyum tried to invent a third way to
minimize double taxation. Short Stop’s returns show some considerable
success. Over the years, including 2015 and 2016, the company reported
little if any taxable income. Boyum accomplished this through what he
called a revolving line of credit. He would record that he had lent money
to Short Stop. Short Stop would not make any regular interest payments
to Boyum. He would instead, at the end of the year, figure out how much
interest he wanted Short Stop to owe him, calculate what interest rate
would generate that sum, apply that rate, and add the resulting amount
to the principal of the loan.

       Short Stop totaled these additions to principal and claimed them
as interest deductions on its returns. Remarkably, the Boyums reported
this interest that they didn’t receive on their joint returns, which in turn
increased their own taxable income. Boyum started doing this years
before 2015. It sparked the IRS’s interest and led to an audit of Short
Stop’s 2006 return. During that audit, the revenue agent explained to
Boyum that any loan that he extends to Short Stop cannot generate
interest deductions on paper to offset income in cash. The agent
ultimately decided to suspend the examination as a “no change” since he
believed that Boyum was receptive, eager to learn, and now aware that
the government did not consider his attempted transformation of
retained earnings into deductible interest to be valid.

       This may not have been the most effective way for the IRS to
handle what it thought of as a compliance problem. Short Stop and
Boyum continued to operate the “revolving line of credit” after the audit
much as they had before. In 2015 Short Stop recorded the interest
payments that it said it owed Boyum at the end of the year as both
interest paid and an increase to principal. Then, in 2016, Short Stop’s
accounting became stranger still.

     To understand how strange, we have to look back at 2012 for
something else Boyum began to do with Short Stop’s books. In that year,
Boyum had decided to buy an interest in a cabin owned by John and
Wendolyn Mickman on Coon Lake in Minnesota. He formed Orfei’s

        4 The Code does not impose the same taxing regime on all business entities.

The IRS has created a “check the box” election that allows an entity such as an LLC to
elect to be taxed either as a corporation or as a passthrough entity. Treas. Reg.
§ 301.7701-3(a). We do note that the “check the box” regulations did not become
effective until 1997, while Short Stop was incorporated in 1989.
                                          4

[*4] Landing, LLP, with the Mickmans, and its stated purpose was to
own and operate the cabin. Boyum paid $90,000 from his personal
account in exchange for a 25% interest in the partnership. But he then
put that interest in Short Stop’s name. The Mickmans kept the other
75% interest, and never actually transferred title to the cabin to the
partnership.

       Boyum said he had Short Stop buy an interest in the cabin
because he hoped to use the corporation to develop the property into a
five-plex or as an investment. Short Stop increased its interest in Orfei’s
Landing in 2014, when $180,000 flowed to the Mickmans for both an
additional 50% interest in the partnership and an option to buy the
remaining 25%. The agreement allowed the Mickmans to continue to
control the property but for Short Stop itself to use the cabin. The
payment for this increased interest also came from Boyum’s personal
account. This time, the agreement required the Mickmans to transfer
the title of the property to the partnership, and a property-tax notice in
the record shows they finally did. Shortly thereafter, Short Stop
exercised the option and bought the remaining 25% interest. Nothing in
the record tells us where this money came from.

       The accounting for this was quite odd. Boyum had been spending
his own money to buy these increasing shares of the cabin held in the
name of a partnership in which Short Stop owned an interest. But it
wasn’t until 2016 that it showed up on the corporation’s books. And it
showed up as an increase in the principal of the loan that Short Stop
recorded that they had received from Boyum. There’s nothing in the
record that tells us why this increase did not take place until 2016, years
after the transactions took place. 5

       Short Stop never did develop the cabin into a five-plex. Boyum
claims that fiscal trouble stemming from the Great Recession of 2008
and 2009 caused the city to change its plans to bring sewer and water
service out to the cabin. He testified that Short Stop could not move
forward with the plan to develop the cabin without those connections.

      One might wonder why Short Stop would start buying shares in
the cabin starting in 2012 when these obstacles to development were

        5 The details of this story are not essential to our analysis of the contested

issues. We also note that we base it on the language of the contract that the parties
stipulated into evidence, and not their somewhat different summary that they also
stipulated. See Jasionowski v. Commissioner, 66 T.C. 312, 318 (1976) (holding that
stipulated facts can be superseded when they are clearly contrary to the record).
                                             5

[*5] already in place in 2009, but the company found other uses for the
property. It used the cabin for parties, to entertain employees and
clients, and to enable the Boyums to spend time on a boat that the
corporation owned and made available to them and their guests. Short
Stop also let Boyum’s son and his friends live there during the school
year. Though Boyum said the boys were both renters and caretakers, we
find that they paid no rent and the record has no documentation of any
caretaking duties.

       There is one last oddity in Short Stop’s accounting. In 2010, Short
Stop lent $25,000 to an unrelated company named Fogerty
Investments. 6 Fogerty made payments on this loan in 2016, but not to
Short Stop—at least not directly. Instead of repaying the loan directly
to Short Stop, Fogerty sent money to Boyum. Short Stop recorded some
of these payments in its ledger as interest payments from Short Stop to
Boyum. 7

       The Commissioner also thought that Short Stop was overloading
its deductions for business equipment on its 2016 return. One of these
deductions was for the cost of the boat on Coon Lake that Boyum used
to entertain employees and clients. Short Stop has since conceded that
the cost of the boat isn’t deductible. But it very much contests the
Commissioner’s disallowance of deductions for a forklift and a plow
attachment. 8 Boyum used the plow to clear snow from the driveway to

        6 Though the total sum of the loan is unclear, at least $25,000 was lent by Short

Stop to Fogerty in 2010.
      7 Part of the payment to Boyum in March was recorded in the ledger. The

November payments made to Boyum were entirely absent from the ledger.
        8 The stipulation of facts states that Boyum purchased a plow and a forklift

that attaches to the plow. It also notes that the forklift is also referred to as a “tractor”
throughout the record. Though forklifts and tractors are distinct, the notice of
deficiency conflated the two and referred to Boyum as having purchased a tractor as
opposed to a forklift. The notice also neglects to mention whether either the plow or
the forklift was an attachment. This error is harmless since both forklifts and tractors
are qualified nonpersonal property under section 179. See Treas. Reg. § 1.274-
5(k)(2)(ii)(K) and (Q); John C. Hom & Assocs. v. Commissioner, 140 T.C. 210, 213 (2013)
(“Mistakes in a notice will not invalidate it if there is no prejudice to the taxpayer.”)
         At trial, however, Boyum testified that the plow and the forklift were both
attachments, claiming that the plow was attached to a one-ton pickup truck and the
forklift was attached to a tractor. Facts that parties have stipulated to are not
disregarded lightly, but we can treat them as superseded when “facts are clearly
contrary to the facts disclosed by the record.” See Jasionowski, 66 T.C. at 318. The
record here is inconsistent, as we have the notice referring to a tractor and a plow
                                             6

[*6] both his home and Short Stop’s building, which is near the Boyums’
home and shares a driveway with it. Boyum would sometimes plow his
neighbor’s driveway too. He used the forklift both to move snow and to
move the pallets on which Short Stop received and stored some of its
business supplies.

II.    Returns

       On its 2015 return Short Stop reported $45,000 in interest-
expense deductions, more than $30,000 of which came in the form of
additions to the principal of the loan owed to Boyum. Adding deductible
but unpaid interest to the principal had a key benefit for Short Stop. It
completely offset its taxable income and generated an NOL that the
company would carry forward from year to year. Short Stop prepared an
NOL worksheet for 2015 that showed the calculation, but did not attach
it to its 2015 return. On this worksheet it reported having a total
available NOL carryforward of over $50,000 to use in 2015, since it had
been adding unpaid interest to principal for years.

       On its 2016 return, Short Stop reported paying over $115,000 in
interest to Boyum. The allocation of those payments is:

                        Source of Interest         Amount Paid

                  Unidentified 9                           $336.00

                  Fogerty Payments                       10,500.00

                  Increase in Principal                 104,287.61

                  Total                               $115,123.61

      Short Stop used its remaining NOL to offset a chunk of its 2016
taxable income.

without mention of attachments, and Boyum’s testimony characterizing both the
forklift and the plow as attachments. The stipulation addresses the
mischaracterization in the notice of deficiency and characterizes the plow as an
attachment to the forklift. On this record, there is not clear evidence that the facts
stipulated are erroneous, and so we will rely on them in our analysis.
      9 This payment was attributable to “BOB BOYUM SHIN HOSPITALITY INT.”

We have no idea what this means.
                                         7

[*7] Short Stop also reduced its tax bill by deducting the cost of the
boat, as well as the plow attachment and the forklift, under section 179.

       Here are those numbers:

                    Description of Property       Cost

                Boat World Princecraft                $32,750

                Trueman Walters Forklift               31,795

                Crysteel-Plow                           5,155

III.   Audit, Petition, and Trial

      Short Stop received a notice of deficiency in which the
Commissioner disallowed the interest deductions. He also disallowed
the NOLs taken for both years because he was disallowing the interest
deductions that generated them. And he disallowed Short Stop’s section
179 deductions for the plow attachment and the forklift, as well as for
the boat, because Short Stop did not primarily use them for business.
He then juiced the total a bit more with 20% penalties under section
6662 for negligence and substantial understatement.

      Short Stop timely petitioned the Court. We tried the case virtually
on a St. Paul calendar. Short Stop is a Minnesota corporation and has
its principal place of business in Minnesota, so appellate venue
presumptively lies in the Eighth Circuit. See § 7482(b)(1)(B).

                                  OPINION

       There are four issues left for us to decide:

   •   Short Stop’s entitlement to interest deductions on its 2015 and
       2016 returns;

   •   Short Stop’s entitlement to the NOL that it carried forward to
       those returns;

   •   Short Stop’s entitlement to the section 179 deductions that it
       claimed on its 2016 tax return; and

   •   whether penalties are appropriate.
                                           8

[*8] I.        The Interest Deductions

      The Commissioner contends that Short Stop’s interest deductions
weren’t really for interest, didn’t have a business purpose, and aren’t
substantiated. The Commissioner took a holistic approach in attacking
the deductions, but we’ll separately analyze the deductions associated
with the interest allocated to the principal of the “line of credit” and the
deductions associated with Short Stop’s loan to Fogerty. 10

          A.     Deducting Unpaid and Accumulated Interest

        The Code’s general rule is that “all interest paid or accrued within
the taxable year” can be deducted so long as no other exceptions or
exemptions in the Code apply. See § 163(a). For a cash-basis taxpayer
deductible interest must be paid and not just owed. Treas. Reg. § 1.461-
1(a)(1). Paid means paid in cash or its equivalent. Eckert v. Burnet, 283
U.S. 140, 141 (1931); Davison v. Commissioner, 107 T.C. 35, 41 (1996),
aff’d, 141 F.3d 403 (2d Cir. 1998). Merely delivering a promissory note
for interest, for example, is not paying interest and isn’t deductible
because a note is a promise to pay and not an actual payment. Don E.
Williams Co. v. Commissioner, 429 U.S. 569, 577–78 (1977); Davison,
107 T.C. at 41.

       Capitalizing interest, which is the term for what Short Stop says
it was doing, is the addition of unpaid interest to the principal of a loan.
But courts have consistently held that adding unpaid interest to a loan
is not the same as paying it. See, e.g., Heyman v. Commissioner, 70 T.C.
482, 485–87 (1978), aff’d, 652 F.2d 598 (6th Cir. 1980). Capitalizing
interest postpones an obligation to pay; it does not discharge that
obligation. Id.

       This is settled law, so well settled that we don’t have to analyze
whether the relationship that Boyum had with his company was truly
that of a creditor and debtor, or whether Short Stop used the money that
it “borrowed” from him for business purposes. Since Short Stop operates
on a cash basis, it is enough for us to find that allocations to the principal
of the loan are not the payment of interest and are therefore not
deductible.

        10 The Commissioner also disallowed a $336 deduction for interest paid to Shin

Hospitality. Short Stop never substantiated the payment or the amount. It also
presented no evidence at trial about it. Short Stop bore the burden of proof, so we find
for the Commissioner on this issue.
                                    9

[*9]   B.    Fogerty Payments

       Our analysis of the payments from Fogerty has to be different
because these payments were actually made and ended up in Boyum’s
bank account, not Short Stop’s. The Commissioner says that paying
interest through a third party is a breach of traditional loan practice.
Maybe. But it is also “well settled that if a taxpayer’s obligation is paid
by a third party, the effect is the same as if the third party had paid the
taxpayer who in turn paid his creditor.” Chapman v. Commissioner, 73
T.C.M. (CCH) 2405, 2412 (1997); see also United States v. Boston &
M.R.R., 279 U.S. 732 (1929); Old Colony Trust Co. v. Commissioner, 279
U.S. 716 (1929). That the payments were made from Fogerty to Boyum
does not render them per se nondeductible by Short Stop.

       The IRS doesn’t contest that Fogerty and Short Stop had a debtor-
creditor relationship. But we have to look more closely at the facts to
figure out whether Fogerty’s payment of interest directly to Boyum
discharged an obligation that Short Stop owed Boyum. And for that we
have to figure out whether Boyum and Short Stop themselves had
created a debtor-creditor relationship with the “line of credit.” Section
163(a) requires not only proof that a payment is a payment of interest,
but also that it is interest derived from a genuine debt. Midkiff v.
Commissioner, 96 T.C. 724, 734 (1991), aff’d sub nom. Noguchi v.
Commissioner, 992 F.2d 226 (9th Cir. 1993). A genuine debt is “an
existing, unconditional, and legally enforceable obligation for the
payment of a principal sum.” Howlett v. Commissioner, 56 T.C. 951, 960
(1971); see also Midkiff, 96 T.C. at 744.

       Short Stop’s ledger accounted for these payments from Fogerty to
Boyum as interest paid by Short Stop to Boyum. The Commissioner
argues that the ledger is wrong—that the correct characterization of
Fogerty’s payments to Boyum is not the legal equivalent of Fogerty’s
paying interest to Short Stop and Short Stop’s paying interest to Boyum
since the money never touched Short Stop’s account. This makes a
difference because the alternative characterization would be as a
dividend, and dividends paid out usually are not deductible by the
corporation that makes them. See § 162(a)(1); Treas. Reg. § 1.162-7(b)(1);
see also Heil Beauty Supplies, Inc. v. Commissioner, 199 F.2d 193, 194
(8th Cir. 1952) (“Any payment arrangement between a corporation and
a stockholder . . . is always subject to close scrutiny for income tax
purposes, so that deduction will not be made, as purported salary, rental
or the like, of that which is in the realities of the situation an actual
distribution of profits.”)
                                          10

[*10] Our analysis focuses on whether these payments were interest or
dividends, which is a question of fact. Delta Plastics, Inc. v.
Commissioner, 85 T.C.M. (CCH) 940, 943 (2003). And it’s a question of
fact that requires us to look for the objective evidence found in the terms
and conditions of the agreement as well as evidence of the parties’
subjective intent. United States v. Uneco, Inc. (In re Uneco, Inc.), 532
F.2d 1204, 1209 (8th Cir. 1976).

       It’s also a question discussed in many cases. The Eighth Circuit
tells us to consider several factors:

    •   whether the corporation is so grossly undercapitalized that the
        loans are in fact needed for capital purposes and are actually
        intended to be risk capital rather than a loan; 11

    •   whether the purported loans were made in proportion to equity
        holdings;

    •   whether the repayment of the loan was predicated on the success
        of the venture;

    •   whether there was a fixed date for payment of the note and a
        reasonable expectation of payment by that date;

    •   whether the obligation to pay was subordinated to other corporate
        debts;

    •   whether third parties would have made the loan under the same
        conditions;

    •   whether the claimed loan was secured by a mortgage or
        otherwise;

    •   whether a provision was made for a sinking fund to retire the
        loan;

         11 In Uneco, the Eighth Circuit made clear that excluding this first factor, the

rest of the factors are not aimed at discerning the subjective intent of the parties. It
held that “the controlling principle should be that any transaction which is
intrinsically clear upon its face should be accorded its legal due unless the transaction
is a mere sham or subterfuge set up solely or principally for tax-avoidance purposes.”
Uneco, 532 F.2d at 1208. The remaining nine factors are aimed at discerning whether
the transaction objectively creates a debtor-creditor relationship.
                                           11

[*11]
   • whether the person making the purported loan participated in the
      management of the corporation; and

    •   whether the corporation had a large proportion of debt to equity. 12

       J.S. Biritz Constr. Co. v. Commissioner, 387 F.2d 451, 457–58 (8th
Cir. 1967), rev’g 25 T.C.M. (CCH) 1175 (1966).

       No one factor is decisive, and all factors may not be equal. Dixie
Dairies Corp. v. Commissioner, 74 T.C. 476, 493 (1980) (citing John
Kelley Co. v. Commissioner, 326 U.S. 521, 530 (1946)). Because debt-
equity questions can arise in so many different circumstances, not all
the factors may even be relevant to every case—especially when the case
involves a shareholder loan to a close corporation. Id. at 494; J.S. Biritz
Constr. Co., 387 F.2d at 456–58. The caselaw teaches us that a true
debtor-creditor relationship exists when there is a business purpose for
making the loan “and the transaction is not a tax-avoidance scheme or
a sham or masquerade.” J.S. Biritz Constr. Co., 387 F.2d at 458. In
addition to the objective inquiry focused on the structure of the
transaction, our analysis hinges on “whether there was an intent to
create a debt with a reasonable expectation of repayment and, if so,
whether that intent comports with the economic reality of creating a
debtor-creditor relationship.” Delta Plastics, Inc., 85 T.C.M. (CCH)
at 943 (citing Litton Bus. Sys., Inc. v. Commissioner, 61 T.C. 367, 377
(1973)).

      Boyum’s revolving line of credit with Short Stop began with an
agreement dated December 31, 2009. The agreement gave Short Stop

        12 In addition to these ten factors, the Eighth Circuit also set out in Uneco a

thirteen-factor test from the Fifth Circuit: “(1) the names given to the certificates
evidencing the indebtedness; (2) the presence or absence of a maturity date; (3) the
source of the payments; (4) the right to enforce the payment of principal and interest;
(5) participation in management; (6) a status equal to or inferior to that of regular
corporate creditors; (7) the intent of the parties; (8) ‘thin’ or adequate capitalization;
(9) identity of interest between creditor and stockholder; (10) payment of interest only
out of ‘dividend’ money; (11) the ability of the corporation to obtain loans from outside
lending institutions; (12) the extent to which the initial advances were used to acquire
capital assets; and (13) the failure of the debtor to pay on due date or to seek a
postponement.” Uneco, 532 F.2d at 1208. Excluding the seventh factor, the Eighth
Circuit found that these factors are also objective and should be used to determine
whether a transaction on its face is an actual loan. Id. Though the intent of the parties
is a relevant factor when discerning whether a debtor-creditor relationship exists, it is
one that we weigh together with the objective factors. See id.
                                         12

[*12] the right to borrow up to $1 million from Boyum, with a maturity
date of December 2019. 13 The agreement did not specify an interest rate,
but instead allowed Boyum to determine the interest rate each year. The
agreement required Short Stop to make monthly interest payments or
add unpaid interest to the loan principal. Along with increasing the
principal, if the interest payments were not paid within 10 days of
becoming due, Short Stop would be in default. Defaulting on the loan
allowed Boyum to demand the principal and interest of the loan be
immediately payable.

       Boyum routinely failed to collect interest on the loan at the end of
each month and instead waited until the end of the year to decide what
interest rate to charge. After deciding the rate, he allocated the interest
owed retroactively to each month. Short Stop then recorded the interest
payments in its ledger as funds distributed to Boyum even though they
really weren’t.

       We therefore find that there was a written agreement between
Boyum and Short Stop defining the terms of the loan, but we specifically
find that these terms were fiction in practice. Short Stop did not
distribute interest to Boyum on a monthly basis, and under the loan
agreement this meant that the unpaid interest was automatically
capitalized. Short Stop’s failure to make timely payments also triggered
the default clause that would allow Boyum to demand payment on the
principal and the interest whenever he wanted to (though he never did).
This tends to suggest that Boyum was not an actual creditor and the
sum provided to Short Stop was a capital contribution.

      There’s also the exceptional strangeness of the way Boyum
determined the interest rate. He did so at the end of the year based in
part on Short Stop’s ability to pay. Boyum testified that he determined
what rate to apply to the loan by reviewing the general market and
Short Stop’s financial wellbeing. Repayment dependent on the fortunes
of a business is generally a strong sign that a payment is a dividend
rather than interest. Dixie Dairies Corp., 74 T.C. at 495. We recognize

        13 This was a revolving line of credit and Short Stop did not take out the

entirety of the $1 million. The record shows that on the general ledger in 2014, there
was a beginning balance of around $350,000 on the loan. There is no indication of when
the money up to this point was distributed to Short Stop. From 2014 until 2016 the
ledger shows that Short Stop increased its loan throughout the years but there is no
clear explanation of where the loan money came from. Included in these loans is the
interest that Boyum “loaned back” to the company and the money that he used to buy
into the partnership that owned the Coon Lake cabin.
                                         13

[*13] that debt can have adjustable interest rates, but such rates are
adjustable in arms-length deals based on a formula that “leaves nothing
to the discretion of the corporate directors.” Monon R.R. v.
Commissioner, 55 T.C. 345, 360–61 (1970). Here there was no formula,
just unfettered discretion on the part of the putative creditor. No
reasonable debtor would agree to a deal like this. This is a strong
indicator that the loan was actually retained earnings. 14

       These factors would themselves be sufficient to support our
finding that the shareholder “loans” were actually shareholder equity,
but the real surge that fries petitioner’s argument is Boyum’s intent in
creating the loan. This is the rare case where we have good evidence of
that subjective intent. Boyum admitted that his goal for this “line of
credit” was to convert as much of the balance as possible to principal. 15
He explained that he believed that when he retired or sold Short Stop,
he could take money out of the corporation as repayment of loan
principal, and thus avoid paying tax on what would otherwise be a
capital gain.

       He also thought it benefited Short Stop because recording some
portion of the retained earnings as interest paid would create deductions
that offset taxable income. The more interest allocated to principal, the
larger the deduction. This would be a tax miracle if it worked. It is
perfectly reasonable for a small-business owner to accumulate capital in
his company. What is unreasonable is to argue that relabeling equity a
“revolving line of credit” can make retained earnings deductible. After
Boyum was expressly told by the IRS during the 2006 audit that the
Code did not permit this relabeling, we find it difficult to believe that
Short Stop’s continuing to do so was motivated by anything other than
a desire to shelter income from tax.

       14 We don’t need to walk through each of the factors enumerated by the Eighth

Circuit since “each case turns upon its particular facts and . . . the varying indicia
applied in determining the issue may or may not have relevancy to a particular case.”
Uneco, 532 F.2d at 1207. The specific facts that we find here enable us to determine
that the arrangement between Boyum and Short Stop did not create a debtor-creditor
relationship to an objective viewer.
        15 Boyum also testified that another motivation for providing Short Stop with

the loan was the fact that Short Stop had previously been unable to secure financing
from banks without Boyum’s securing the loans with his personal assets. Even if we
believed Boyum’s testimony on this point, Short Stop’s inability to secure a loan from
banks is itself an indicator that the “loans” were really “retained earnings.”
                                     14

[*14] We find for the Commissioner and disallow the interest
deductions. Short Stop is not entitled to deductions for what it called
additions to the principal amount of what it called a loan from Boyum;
neither is it entitled to deductions for repayment of what it called a loan
in the form of payments from Fogerty to Boyum directly.

II.    NOL

       Our finding on the interest question lets us short circuit our
discussion of the next issue—whether Short Stop is entitled to the large
NOL deductions that it claimed because of those interest deductions.
Section 172 allows a taxpayer to take an NOL carryover from earlier
years and an NOL carryback from later years when its taxable income
in the current year is more than zero. § 172(a), (b)(2). A taxpayer must,
however, elect to carry NOLs forward. Without an election to do so, the
Code’s default rule is to apply the NOL to the two preceding years.
§ 172(b)(1) and (2). If the loss is not fully absorbed after carrying it back,
only then can it be carried forward through the next 20 years. Id. The
loss must also be consumed in the earliest year when there is income
available to be offset. § 172(b)(2).

      Short Stop claimed an NOL of about $20,000 for 2015 and about
$33,000 for 2016. The Commissioner argues that had the interest
deductions Short Stop claimed in prior years been properly disallowed,
there would either not have been any NOL, or if there had been, it would
have been absorbed by taxable income earned before 2015.

       Short Stop has the burden here. See Treas. Reg. § 1.6001-1(a);
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). This requires
it to prove both the existence and the amounts of its claimed NOL
carrybacks and carryforwards. See Rule 142(a); Keith v. Commissioner,
115 T.C. 605, 621 (2000); Jones v. Commissioner, 25 T.C. 1100, 1104
(1956), rev’d and remanded on other grounds, 259 F.2d 300 (5th Cir.
1958).

       In this case, that means Short Stop had to prove that the NOL
carryforwards it took in 2015 and in 2016 were real and would not have
been absorbed by a previous year. See Leitgen v. Commissioner, 42
T.C.M. (CCH) 1130, 1131–32 (1981). Short Stop first argues that we
should not look at the truth of its claims to NOLs for tax years before
2015. Section 6214(b) tells us, however, that we may consider facts
relating to years not in issue that are relevant to a year that is before
us. See, e.g., Lee v. Commissioner, 91 T.C.M. (CCH) 999, 1001 (2006).
                                   15

[*15] This is especially important in the case of determining an NOL,
since correcting any errors made in earlier tax years might well lead to
the reduction or elimination of an NOL that a taxpayer wants to use for
later years.

       The NOL carryforward that Short Stop used to offset its 2015 and
2016 income was derived from a nearly $19,000 NOL it claims to have
suffered in 2010 and a nearly $34,000 NOL it claims to have suffered in
2014. Short Stop did not, however, submit any evidence that it elected
to waive the two-year NOL carryback for either of those losses. We do
know that Short Stop was taking interest deductions from the
shareholder “loan” in years before 2015, but this just complicates things
a bit more, because we have to exclude any such deductions as we try to
figure out whether it had a real loss and how much that loss was.

       We can’t do that here because Short Stop didn’t give us evidence
of the amount of the interest-expense deductions it claimed that were
attributable to the shareholder loan in 2011 or earlier years. Short Stop
did report a nearly $53,000 loss attributable to unpaid “interest” for
2012, and then another $20,000 loss for 2013. We have to disregard
those bogus losses, but that then means that if Short Stop actually had
an NOL in 2010, it would have been fully absorbed in 2012 alone.

       Short Stop’s situation in 2014 is a bit different. Its $34,000 NOL
for 2014 comes mostly from the bogus interest deduction, and we have
to reduce the NOL by the portion of the loss generated from this
deduction. But that leaves Short Stop with a potential carryover loss of
only $762.68. And even this loss would need to first be carried back to
the two preceding years before it could be carried forward to the 2015
tax year, because Short Stop did not elect to waive the carryback on its
return. Without the disallowed interest deductions there is no NOL at
the beginning of Short Stop’s 2015 tax year for it to carry forward.

       Short Stop also has a procedural problem here. There is a
regulation that requires a taxpayer to substantiate its claim to this
deduction by filing sufficient evidence of its NOL with its return. This
includes a “concise statement setting forth the amount of the net
operating loss deduction claimed and all material and pertinent facts
relative thereto, including a detailed schedule showing the computation
of the net operating loss deduction.” Treas. Reg. § 1.172-1(c). Though
Short Stop had NOL carryover worksheets, it did not file them with
either its 2015 or 2016 return. This alone disqualifies the company from
taking the deduction. See Amos v. Commissioner, 124 T.C.M. (CCH) 289,
                                          16

[*16] 292 (2022) (first citing Ghafouri v. Commissioner, 111 T.C.M.
(CCH) 1023 (2016); and then citing Treas. Reg. § 1.172-1(c)).

       Even if Short Stop had submitted the required form, the only
evidence that it gave us of any of its losses, whether due to these
“interest” deductions or not, were its returns and the worksheet. It
introduced no evidence that the information on the worksheet was
accurate, and a “tax return is merely a statement of a taxpayer’s claim
and does not establish the correctness of the facts stated therein.” Fitch
v. Commissioner, 104 T.C. M. (CCH) 828, 835 (2012). This too is a failure
of substantiation. See Jones, 25 T.C. at 1104; McRae v. Commissioner,
118 T.C.M. (CCH) 476, 482 (2019); Lee, 91 T.C.M. (CCH) at 1001.

       By disallowing the interest-expense deductions that Short Stop
took in prior years, any loss generated from 2010 or 2014 would have
been fully absorbed and left nothing to carry forward to 2015, let alone
to 2016. The disallowance of the deduction also almost entirely
dissipates any NOL that was generated in 2014. Even if there was a loss,
Short Stop failed to submit an NOL worksheet with its returns, which
alone disqualifies it from taking an NOL deduction. And if all this were
not enough, Short Stop failed to substantiate any remaining losses that
it carried forward.

III.    Section 179 Deductions

       The Commissioner next wants us to disallow Short Stop’s section
179 deductions for the plow attachment and forklift. Section 179 allows
a taxpayer to deduct the full cost of an asset in the year of purchase,
even if it will use the asset for years to come. § 179(a). 16 (Short Stop
conceded the boat as nondeductible before trial.) There are limits—a
dollar limit, § 179(b)(1), an aggregate-taxable-income limit, § 179(b)(3),
and a limit on using section 179 to deduct the cost of certain passenger
vehicles, § 179(b)(5).

      The controversy in this case, however, has a more conventional
source: the Commissioner contends that Short Stop didn’t use the plow

        16 Section 179 property is defined as tangible personal property which is section

1245 property and is “acquired by purchase for use in the active conduct of a trade or
business.” § 179(d)(1). Section 1245 property is any property that is subject to the
depreciation allowances under section 167. § 1245(a)(3). Since all section 179 property
is a subset of section 1245 property absent a section 179 election, Short Stop would
have been able to deduct only depreciation rather than the full cost of the property.
See §§ 1245(a)(3), 167(a).
                                    17

[*17] attachment or the forklift for its business. Boyum heartwarmingly
testified about posing some of his progeny in the bucket of the snowplow
for a photo op. If that were the only problem, it would not be
disqualifying—the test is not that property has to be exclusively used in
business; it is whether it is predominantly used for business. Treas. Reg.
§ 1.179-1(d)(1). “Predominantly” means more than half: if a taxpayer
uses the property more than 50% of the time in its business, then “the
portion of the cost . . . attributable to the trade or business use” can be
deducted to the extent that it does not exceed the general limitations of
section 179. Treas. Reg. § 1.179-1(d)(1), (e)(2).

       The problem is one of proof. A taxpayer who claims a deduction
under section 179(a) has to substantiate it with proof of where and when
it got the property, when it placed the property into service, and how
much it paid. Treas. Reg. § 1.179-5(a). We may estimate the amount, but
there must be persuasive evidence that it paid at least the amount that
it claimed. Boyd v. Commissioner, 122 T.C. 305, 320 (2004).

       The rules are stricter for property that is listed in section
274(d)(4). Listed property forces a taxpayer to show proof of (1) its cost,
(2) the time it was bought, and (3) a description of the expense’s business
purpose. Id.; Temp. Treas. Reg. § 1.274-5T(b)(6).

      That usually means a contemporaneous log, diary, trip sheet, or
something similar that substantiates how much a vehicle was actually
used for business rather than personal purposes. Temp. Treas. Reg.
§ 1.274-5T(c). A taxpayer without contemporaneous records has a bigger
problem. It must produce other credible evidence sufficient to
corroborate its own statements concerning business use. Id. Under this
heightened burden, we may not provide estimates of the appropriate
deduction if the taxpayer does not fully substantiate its expenses. Boyd,
122 T.C. at 320.

       Section 274 therefore requires that we first analyze whether and
when the Code treats attachments as the vehicles to which they are
attached. We know that listed property includes any passenger
automobile. Treas. Reg. § 1.280F-6(b)(1)(i). A “passenger automobile”
includes a four-wheeled vehicle that is manufactured primarily for use
on public streets, roads, and highways, and is rated at 6,000 pounds
gross vehicle weight or less. Id. para. (c)(1). A passenger automobile also
includes “any part, component, or other item that is physically attached
to the automobile or is traditionally included in the purchase price of an
automobile.” Id. subpara. (2).
                                   18

[*18] This regulation leads us to conclude that attachments to vehicles
are treated like the vehicles themselves. In Short Stop’s case, the plow
was attached to the forklift. Forklifts are not primarily used on public
streets. That makes a forklift—and any attachment to a forklift—a
“qualified nonpersonal use vehicle” in tax jargon. Id. para. (c). A
“qualified nonpersonal use vehicle” is a vehicle, by reason of its nature
(that is, design), which is not likely to be used more than a de minimis
amount for personal use. Treas. Reg. § 1.274-5(k)(2). The regulations
specifically include forklifts in this exclusion. Id. subdiv. (ii)(K).

       The forklift and the plow attachment are not listed property and
are therefore not subject to the heightened substantiation requirement
of section 274.

       We now must decide whether the property was predominantly
used for business purposes.

      A.     Plow Attachment

       We take judicial notice that Minnesota can get a fair bit of snow
in the winter. And we entirely believe Boyum’s testimony about how
Short Stop used the plow attachment—to clear the driveway between
the road and the Boyums’ home, and somewhat beyond that to the Short
Stop headquarters building and warehouse. He’d also sometimes be a
good neighbor and plow the driveway next door. The problem is that we
have no evidence of what proportion of these uses was for the business
and what proportion was for personal use. We think it more likely than
not that Short Stop did not use the plow attachment predominantly for
business uses as the use was not only divided between plowing the
Boyums’ residence and their business, but also their neighbors’
driveway.

       We need not determine an exact allocation of personal use and
business expense for the plow in addition to the finding that it was not
used over 50% for business. This is because the Commissioner found
that Short Stop used the plow 50% for business purposes, and allowed
it a depreciation deduction of about half of what it would have been
allowed if it had both not chosen to claim a section 179 deduction and
used the plow only for business. We will disallow the deduction only to
the extent the Commissioner contested it.
                                       19

[*19] B.        Forklift

       The forklift is another story. Short Stop used it for a lot of
undoubtedly business uses—to unload trucks, move pallets, and lift
products at worksites. Although a close question, we do think we can
take judicial notice that Minnesota does have lovely seasons that are
snow-free, which means Short Stop was using the forklift entirely or
almost entirely for business for much of that part of the year. It is true
that the only evidence we have on this is Boyum’s testimony, but on this
point we find his testimony credible. Since the forklift is not subject to
the heightened substantiation requirements of section 274(d), we may
estimate an appropriate percentage of business use and allow a
reasonable deduction.

      We think it more likely than not that Short Stop used the forklift
predominantly in its business, and we think it is reasonable to find that
Short Stop used it 70% for business purposes. That means that it gets
to expense 70% of the forklift’s cost in 2016. See § 179; Treas. Reg.
§ 1.179-1(d)(1).

IV.       Penalties

       That leaves one issue—whether Short Stop owes accuracy-related
penalties under section 6662. The Commissioner determined that Short
Stop both was negligent and substantially understated its tax.
Substantial understatements look easy to prove here. The Code defines
an understatement as substantial if it exceeds the lesser of 10% of the
tax required to be shown on the return or $10 million. § 6662(d)(1)(B).
The deficiency for 2015 was $8,138. This was also the entire tax liability
for the year, which means that 100% of the tax required to be shown was
understated. This is well above the required 10% threshold. 17

      Short Stop’s defense is that it relied on advice from tax
professionals when it took its positions on its 2015 and 2016 returns.
Thus, Short Stop needs to show that:

      •   its adviser was a competent professional who had sufficient
          expertise to justify reliance;

       17 The Commissioner does not bear the burden of production as to compliance

with section 6751(b)(1) because Short Stop is a corporation. See NT, Inc. v.
Commissioner, 126 T.C. 191, 195 (2006).
                                         20

[*20]
   • it gave the adviser necessary and accurate information; and

   •   it actually relied in good faith on the adviser’s advice.

See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000),
aff’d, 299 F.3d 221 (3d Cir. 2002). Whether a taxpayer relied on advice
and whether his reliance was reasonable turn on the facts and
circumstances of the case. See Treas. Reg. § 1.6664-4(c)(1).

       The professional whose advice Short Stop claimed it relied on is
Mike Mischke, a licensed CPA. Mischke has over ten years of experience
in preparing corporate tax returns. No one contests that he is a
competent professional. The problem for Short Stop is the second and
third Neonatology requirements: Did Short Stop give Mischke necessary
and accurate information on some of the items that created its
deficiencies? And did Short Stop rely on that advice?

       Mischke credibly testified that he was aware of the loan and
Boyum’s practice of adding unpaid “interest” to the loan principal.
Mischke, however, also credibly stated that he did not advise Short Stop
to take this position, and that Boyum had instructed him that the
allocation and subsequent interest-expense deduction was “the way he
was going to handle it.”

       As for the validity of the increased principal and the interest
generated from the purchase of the cabin, Mischke did not recall
receiving a copy of any paperwork describing Short Stop’s purchase of
the interest in the partnership. He did not know whether he saw the
checks and was not sure whether he was even aware that the cabin was
bought with Boyum’s personal checks. We find it more likely than not
that Mischke did not know the vital detail that Boyum was purchasing
the interest in the partnership from his personal account. In any event
Mischke again credibly stated that Short Stop did not ask his advice on
how to record the purchase of the cabin and that he did not advise Short
Stop to record the purchase of the cabin as an increase to the principal
of the shareholder loan. 18

      There were similar problems for the section 179 deductions taken
in 2016. Mischke could not remember whether Boyum gave him the

       18 Boyum himself testified that he also relied on his previous tax adviser. All

we have on this is Boyum’s own testimony, and we do not find him credible on this
point.
                                    21

[*21] actual invoices for the plow attachment and the forklift, or
whether Boyum had simply given him the accounts and said he’d bought
them for Short Stop. Mischke also testified that he could not remember
whether he was asked for advice about how to report the purchase of the
boat and that he did not know whether he “was smart enough to know
the answer to that.” We find from this that Mischke never gave advice
on the section 179 deductions that Short Stop claimed for 2016.
Therefore, Short Stop has not shown reasonable reliance on the advice
of a tax professional for any of the contested issues.

      Without the reliance defense, Short Stop fails to show the
deductions were reasonable and claimed in good faith. See § 6664(c)(1).
A taxpayer acts with reasonable cause when it exercises “ordinary
business care and prudence.” Estate of Young v. Commissioner, 110 T.C.
297, 317 (1998) (citation omitted) (citing United States v. Boyle, 469 U.S.
241, 245 (1985)).

      Here, the problem for Short Stop was that an IRS revenue agent
explained during the audit of its 2006 return that claiming interest
deductions by increasing the principal of a shareholder “loan” did not
work. We find that this made it unreasonable for Short Stop to keep
doing what it did in reporting interest paid that it never paid.

       As for deducting the boat under section 179, the substantial
personal use of the boat makes its claimed deduction unreasonable.
Though the deductibility of the boat was not contested at trial, we find
that Short Stop could not have reasonably believed that a boat kept at
the cabin at which it threw parties and allowed Boyum’s son to live was
for actual business use.

       However, the forklift and the plow attachment were actually used
in part—and in the case of the forklift, mostly—for business. Short Stop
provided no record or allocation, however, of the proportion of business
use for this equipment. The problem for Short Stop here is that we’ve
found it to be a company that has taken unreasonable reporting
positions for a long time, and after being warned not to do so by an IRS
revenue agent. It had a competent adviser but didn’t rely on him for
advice. So, even if other taxpayers might have been reasonable in
deducting the cost of the equipment, Short Stop itself was unreasonable
in not substantiating these deductions. The failure to track and
substantiate in any way their varied uses was not reasonable
                                          22

[*22] here. 19 We therefore find that the accuracy-related penalties apply
for both years at issue.

        Short Stop wins a bit on the forklift, so

        Decision will be entered under Rule 155.

        19 Even though we found that the forklift was used 70% for business, the fact

that Short Stop used the forklift for personal ends and still tried to deduct its entire
cost renders its position unreasonable as to the disallowed part. The nature of a section
179 deduction allows for a deduction of the entire cost of property only if the property
is used solely for business. Had Short Stop claimed a 90% or even a 95% deduction for
the cost of the forklift, we might well have found its estimate of the proportion of
business use to have been reasonable. What we cannot do is find it was reasonable for
Short Stop to claim a deduction for the entire cost of the forklift under section 179
when it knew that the forklift was being used at least in part for personal ends.