T.C. Memo. 2005-53
UNITED STATES TAX COURT
BRADLEY K. MORRISON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18140-03. Filed March 23, 2005.
William E. Taggart, Jr., for petitioner.
Patricia Montero, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined the following
deficiencies in and accuracy-related penalty on petitioner’s
Federal income taxes:1
1
All amounts are rounded to the nearest dollar.
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Penalty
Year Deficiency Sec. 6662(a)
1999 $87,780 $17,556
2000 4,075 --
After concessions,2 the issues for decision are: (1)
Whether payments made on behalf of petitioner or disbursements
directly to petitioner by Caspian Consulting Group, Inc., during
1999 and personal charges petitioner made on a company credit
card in 2000 were constructive dividends; and (2) whether
petitioner is liable for an accuracy-related penalty under
section 6662(a)3 for 1999.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
Belmont, California, at the time he filed his petition.
Petitioner owned 40 percent of the outstanding stock of
Caspian Consulting Group, Inc. (Caspian). Petitioner provided
“technical services and expertise to * * * [Caspian’s] service
and support teams.” Nariman Teymourian (Mr. Teymourian) owned
the remaining 60 percent of the Caspian stock.
2
Petitioner conceded that he had additional interest
income of $227 in 2000.
3
Unless otherwise stated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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During 1999, Caspian paid $40,000 to the Internal Revenue
Service and $8,000 to the California Franchise Tax Board to
satisfy petitioner’s tax liabilities. Caspian also made
disbursements of $200,000 and $32,623 directly to petitioner
during 1999. These payments and disbursements will hereinafter
be referred to as the 1999 payments and disbursements.
During 2000, petitioner charged $26,338 to a company credit
card for personal items (2000 personal charges). Petitioner
reimbursed Caspian $14,059 through payroll deductions in 2000.
OPINION
I. Burden of Proof
Petitioner does not assert that section 7491(a) shifts the
burden of proof to respondent. Petitioner also did not satisfy
the requirements of section 7491(a)(2). Therefore, petitioner
bears the burden of proof. Rule 142(a).
II. Loan Analysis
Petitioner contends that the 1999 payments and disbursements
and the 2000 personal charges were loans. Respondent determined
that the 1999 payments and disbursements and the 2000 personal
charges were constructive dividends to petitioner.
The Court of Appeals for the Ninth Circuit defines a loan as
“‘an agreement, either express or implied, whereby one person
advances money to the other and the other agrees to repay it upon
such terms as to time and rate of interest, or without interest,
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as the parties may agree.’” Commissioner v. Valley Morris Plan,
305 F.2d 610, 618 (9th Cir. 1962) (quoting Natl. Bank v. Fid. &
Cas. Co., 131 F. Supp. 121, 123 (S.D. Ohio 1954)). The Court of
Appeals determines whether a transaction is a loan by examining
the transaction as a whole. See Bloom v. I.C. Sys., Inc., 972
F.2d 1067, 1068 (9th Cir. 1992); Estate of Chism v. Commissioner,
322 F.2d 956, 960 (9th Cir. 1963), affg. Chism Ice Cream Co. v.
Commissioner, T.C. Memo. 1962-6.
In Welch v. Commissioner, 204 F.3d 1228, 1230 (9th Cir.
2000), affg. T.C. Memo. 1998-121, the Court of Appeals found the
following seven factors relevant in determining whether a
transaction qualified as a true loan:
(1) whether the promise to repay is evidenced by a note
or other instrument; (2) whether interest was charged;
(3) whether a fixed schedule for repayments was
established; (4) whether collateral was given to secure
payment; (5) whether repayments were made; (6) whether
the borrower had a reasonable prospect of repaying the
loan and whether the lender had sufficient funds to
advance the loan; and (7) whether the parties conducted
themselves as if the transaction were a loan. * * *
The seven factors are nonexclusive, and no single factor is
dispositive. Id. The seven factors form a general basis upon
which the Court of Appeals analyzes transactions. Id.
A factor evidencing a loan is the lender’s charging the
borrower interest. A partner of the accounting firm that
prepared petitioner’s individual income tax return and Caspian’s
corporate income tax return testified that the $14,059 deducted
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from petitioner’s salary was a payment for the interest that
accrued in 2000 on the 1999 payments and disbursements. The
partner testified that in 2000 interest accrued at the rate of
6.2 percent. We find that this factor weighs in favor of
petitioner.
Repayments to the lender from the borrower are evidence of a
loan. Petitioner partially repaid his debt in 1999 by
transferring $53,869 to Caspian. Petitioner credibly testified
that he repaid the balance of the 1999 payments and disbursements
and the 2000 personal charges. We find that this factor weighs
in favor of petitioner.
A loan may exist if the borrower had a reasonable prospect
of repaying the loan and if the lender had sufficient funds to
advance the loan. Petitioner’s 1999 payments and disbursements
totaled $280,623. Petitioner’s 2000 personal charges totaled
$26,338.
Petitioner reported adjusted gross income of $132,351 and
$159,973 in 1999 and 2000, respectively. We find that petitioner
had a reasonable prospect of repaying the advanced amounts.
The corporate income tax returns for Caspian listed taxable
income of $1,257,491 and $360,116 for 1999 and 2000,
respectively, and total income of $4,839,233 and $11,414,363 for
1999 and 2000, respectively. We conclude that Caspian had
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sufficient funds to advance the amounts. Therefore, this factor
weighs in favor of petitioner.
The conduct of the parties may indicate the existence of a
loan. The conduct of petitioner and Caspian was consistent with
the existence of a loan. Petitioner repaid the entire loan.
Petitioner testified that the 1999 payments and disbursements
were used to purchase a house and pay tax liabilities. The 2000
personal charges were used for personal expenses. We find that
this factor weighs in favor of petitioner.
After reviewing the above factors, we conclude that the 1999
payments and disbursements and the 2000 personal charges were
loans.
III. Penalty
Pursuant to section 6662(a), a taxpayer may be liable for a
penalty of 20 percent on the portion of an underpayment of tax
(1) attributable to a substantial understatement of tax or (2)
due to negligence or disregard of rules or regulations. Sec.
6662(b).
We have found for petitioner on the issue of whether the
1999 payments and disbursements were loans. Therefore, there is
no underpayment of tax for 1999 on which a penalty may be
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imposed. Sec. 6662(d)(1)(A). Accordingly, we do not sustain
respondent’s penalty determination.
To reflect the foregoing,
Decision will be entered
under Rule 155.