FILED
NOT FOR PUBLICATION
JUN 19 2018
UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
LITTLE MOUNTAIN CORPORATION, No. 16-73957
Petitioner-Appellant, Tax Ct. No. 581-15
v.
MEMORANDUM*
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.
Appeal from a Decision of the
United States Tax Court
Argued and Submitted June 6, 2018
Pasadena, California
Before: WARDLAW and CHRISTEN, Circuit Judges, and MOLLOY,** District
Judge.
Little Mountain Corporation (“LMC”) appeals the Tax Court’s ruling that it
had not met its burden of substantiating a $896,493 deduction for compensation
under IRC § 162(a)(1) on its 2011 tax return. We review the Tax Court’s legal
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
The Honorable Donald W. Molloy, United States District Judge for
the District of Montana, sitting by designation.
conclusions de novo and its factual determinations for clear error. Cooper v.
Comm’r of Internal Revenue, 877 F.3d 1086, 1090 (9th Cir. 2017). We affirm.
The Tax Court’s conclusion that LMC failed to substantiate that Always
Frank Consulting (“AFC”) was paid $896,493 was not clearly erroneous. Franklin
and Susan Sanders testified that AFC received that amount. However, the Tax
Court’s conclusion was plausible and supported by record evidence: the relevant
checks were made out to “cash,” not to AFC or Franklin Sanders; they were
endorsed by individuals unaffiliated with AFC; LMC provided no documentation
indicating that AFC requested payment in cash; there were no receipts from AFC
indicating that it or Franklin received the cash; and LMC did not issue a Form
1099 to AFC or Franklin Sanders. Furthermore, while Susan Sanders maintained a
ledger indicating $896,493 in “consulting” expenses, the ledger’s weight must be
discounted because the dates recorded in the ledger do not match the dates on the
corresponding checks made out to “cash.”
Nor was the Tax Court’s finding that LMC failed to substantiate that the
$896,493 was “compensation” as required by IRC § 162(a)(1) clearly erroneous
because it was plausible and supported by record evidence. First, neither Susan
Sanders nor Franklin Sanders was able to testify with specificity about the work
AFC performed for LMC supporting particular consulting invoices, and the
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invoices themselves do not include any description of tasks performed but instead
include only a generic statement that consulting, writing, and office managerial
services were performed. Second, while Franklin Sanders testified that he worked
approximately the same number of hours each week with one particularly busy
week each month, the invoiced amounts per day of work vary significantly and
randomly, lacking a month-to-month pattern. The record evidence supports the
conclusion that the payments to AFC were based on LMC’s profit, not AFC’s
services. The dates on the actual checks did not match the ledger dates; AFC had
not provided hourly rates or a fee schedule for its services to LMC; the $896,493
paid to AFC was a significant majority of LMC’s net corporate income; and no tax
forms were issued to AFC. Cf. 26 C.F.R. § 1.162-7(a) (requiring payments to be
“purely for services” to be deductible compensation under IRC § 162(a)(1)).
AFFIRMED.
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