                         T.C. Summary Opinion 2015-40



                         UNITED STATES TAX COURT



              GEORGE LAWRENCE STARKE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 6151-13S.                          Filed July 7, 2015.



      George Lawrence Starke, pro se.

      William J. Gregg, John D. Ellis, and Bartholomew Cirenza, for respondent.



                              SUMMARY OPINION


      BUCH, Judge: This case was heard pursuant to section 7463 of the Internal

Revenue Code in effect when the petition was filed.1 Under section 7463(b), the


      1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year in issue, and all Rule references are to the Tax
                                                                       (continued...)
                                         -2-

decision to be entered in this case is not reviewable by any other court, and this

opinion may not be treated as precedent for any other case.

      The issues before the Court are whether George Starke received

nonemployee compensation in 2010 and whether he is liable for an accuracy-

related penalty under section 6662(a). Because any amount Mr. Starke may have

received as nonemployee compensation was taxable in a prior year, we hold that

Mr. Starke is not liable for the deficiency determined by respondent or the

accuracy-related penalty under section 6662(a).

                                    Background

      During the 1970s and 1980s Mr. Starke was an offensive lineman in the

National Football League, most notably with the Washington Redskins. After

retiring from football, Mr. Starke opened a car dealership in Maryland. While

running his car dealership, Mr. Starke observed that there was a shortage of

qualified service technicians in the greater Washington, D.C., area. He also

perceived that there was a problem with violence and poverty in the area. To

address these problems, Mr. Starke established a school that would teach people in

the community to become automotive service technicians.


      1
      (...continued)
Court Rules of Practice and Procedure.
                                        -3-

      In the late 1990s Mr. Starke sold his car dealership and cofounded the Excel

Institute (Excel), a nonprofit corporation. Excel provided a two-year program that

taught basic reading, writing, and arithmetic in addition to providing job

counseling and technical training. The program was available free of charge to

any persons who wanted to participate so long as they committed to the attendance

requirements. Initially, Excel did not have any outside funding, and Mr. Starke

taught many of the classes and largely funded it himself.

      After Mr. Starke’s original board chair passed away, Jack Lyon joined Excel

as chair. Eventually, Mr. Lyon took over the day-to-day management of Excel,

which created tension between him and Mr. Starke. As difficulties between Mr.

Starke and Mr. Lyon grew, Mr. Starke’s responsibilities shifted away from

management and more into fundraising. In the late 2000s Mr. Starke learned of an

investigation into Excel’s fiscal management. Citing ethical concerns, Mr. Starke

stopped fundraising for Excel.

      During Mr. Starke’s employment at Excel he was paid a salary plus a

housing allowance. Mr. Starke also had access to an American Express card for

Excel. Mr. Starke used the American Express card for both personal and Excel-

related expenses, but he did not consistently provide receipts to Excel showing his

expenses. According to one of Excel’s accountants, during the year in issue if an
                                        -4-

employee made a purchase on one of Excel’s credit cards and the employee could

not show that it was an expense benefiting Excel, Excel would treat the expense as

an advance or prepaid expense on the employee’s behalf.

      Excel’s general ledgers from 2003 to 2010 show various entries labeled

advances or prepaid expenses that are attributable to Mr. Starke. All of Mr.

Starke’s advances and prepaid expenses occurred between 2003 and 2006. In

contrast, the only entries from 2007 to 2010 are payroll deductions for Mr. Starke

that offset the previous advances and prepaid expenses. Mr. Starke testified that

he did not know why the amounts were being deducted, but he assumed it was

related to taxes or healthcare expenses. Respondent introduced a 2005 letter from

Excel’s accountant to Mr. Lyon establishing a repayment plan, including payroll

deductions, to recoup “salary advances to George Starke that have accumulated

over the years.” Mr. Starke stated that he never received a copy of this letter.

      Mr. Starke’s employment with Excel ended in 2010. Subsequently, Excel

mailed Mr. Starke a 2010 Form 1099-MISC, Miscellaneous Income, reflecting

$83,698.45. According to Excel’s 2010 general ledger, this amount represented

advances and prepaid expenses that Mr. Starke had not repaid when he left Excel.

Mr. Starke received the Form 1099-MISC but did not include the amount in his

income when he filed his 2010 Form 1040, U.S. Individual Income Tax Return.
                                         -5-

      The Internal Revenue Service examined Mr. Starke’s 2010 return. On

December 17, 2012, the IRS issued a notice of deficiency to Mr. Starke adjusting

his income to include the amount from the Form 1099-MISC as nonemployee

compensation and determining an accuracy-related penalty under section 6662(a).

Mr. Starke, while residing in the District of Columbia, timely petitioned.

                                     Discussion

      The Commissioner’s determinations in the notice of deficiency are generally

presumed correct, and taxpayers bear the burden of proving otherwise.2 Several

other rules can affect the burden of production and the burden of proof. For

example, in an unreported income case such as this, the Commissioner generally

must make some minimal evidentiary showing (which he has done) for the

presumption of correctness to attach.3 And where there is a reasonable dispute

with respect to an item reported on an information return, the Commissioner has

the burden of producing reasonable and probative information (which he has

done).4 Even then, the burden may shift to the Commissioner under section

7491(a) if the taxpayer introduces credible evidence regarding the issue, has


      2
          Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
      3
          See Dunne v. Commissioner, T.C. Memo. 2008-63.
      4
          Sec. 6201(d).
                                        -6-

complied with the necessary substantiation requirements, has maintained all

records, and has cooperated with reasonable requests for witnesses, information,

documents, meetings, and interviews. There is insufficient information in the

record to conclude that the burden should shift under section 7491(a), and Mr.

Starke does not argue that the burden should shift. Accordingly, the burden

remains on him. But ultimately the burden is immaterial in this case because we

decide this case on the preponderance of the evidence.

      Section 61 defines gross income as “all income from whatever source

derived”. Income can include the forgiveness of indebtedness or compensation for

services.5 In some instances, compensation can be advanced with services to be

performed later. The distinction is an important one. An advance on services to

be performed in the future is taxed at the time of the advance.6 In contrast, income

from the discharge of indebtedness is taxed at the time “it becomes clear that a

debt will never have to be paid”.7

      Whether an amount is an advance or a loan turns on the question of whether

a debtor-creditor relationship was established at the time the funds were disbursed.


      5
          Sec. 61(a)(1), (12).
      6
          Beaver v. Commissioner, 55 T.C. 85 (1970).
      7
          Cozzi v. Commissioner, 88 T.C. 435, 445 (1987).
                                         -7-

In the case of a loan, which is not included in income at the time the funds are

disbursed, the parties agree that the amount will be repaid and the debtor-creditor

relationship is established at the outset.8 However, an advance that is considered

compensation for services, albeit services to be rendered in the future, constitutes

taxable income in the year it is received.9 We determine whether a bona fide

debtor-creditor relationship exists by examining all of the pertinent facts and “[a]n

essential element is whether there exists a good-faith intent on the part of the

recipient of the funds to make repayment and a good-faith intent on the part of the

person advancing the funds to enforce repayment.”10

      Here, respondent argues the payments are advances and not loans. We

agree that the payments are not loans because we find no evidence that Mr. Starke

intended to repay them at the time the payments were made. Although Mr. Starke

incurred payroll deductions by Excel, he testified that he did not know why the

amounts were being deducted. Further, there is no evidence of loan documents or

any other document signed by Mr. Starke and a member of Excel memorializing a



      8
     Commissioner v. Tufts, 461 U.S. 300, 307 (1983); Beaver v.
Commissioner, 55 T.C. at 91.
      9
          Beaver v. Commissioner, 55 T.C. at 91.
      10
           Fisher v. Commissioner, 54 T.C. 905, 909-910 (1970).
                                        -8-

loan agreement. Even the 2005 letter from Excel’s accountants that set forth a

repayment plan makes clear that Excel and its accountants did not consider the

payments to be loans, instead characterizing them as advances.

      Because we agree that the payments were not loans, we would ordinarily

look to whether the payments are considered advances; however, whether the

payments are advances is irrelevant in this case because all of the items recorded

by Excel as advances or prepaid expenses were recorded for years that are not

before the Court. According to Excel’s general ledgers, all of the payments were

made before 2010. Because advances are taxable for the year in which they are

paid, any advance would have been taxable for years that are not before us.

      Therefore, respondent’s adjustments based on the 2010 Form 1099-MISC,

which includes amounts attributable only to potential advances, are disallowed

because none of the amounts are taxable for 2010. Because of this holding, Mr.

Starke is also not liable for the accuracy-related penalty under section 6662(a).

      To reflect the foregoing,


                                              Decision will be entered for

                                       petitioner.
