Case: 14-10288    Date Filed: 11/20/2014   Page: 1 of 20


                                                                      [PUBLISH]



             IN THE UNITED STATES COURT OF APPEALS

                    FOR THE ELEVENTH CIRCUIT
                      ________________________

                               No. 14-10288

                         Non-Argument Calendar
                       _______________________

                            Agency No. 26552-10



PHILIP LONG,

                                                             Petitioner-Appellant,

                                    versus

COMMISSIONER OF IRS,

                                                          Respondent-Appellee.

                       ________________________

                  Petition for Review of a Decision of the
                          United States Tax Court
                        ________________________

                            (November 20, 2014)

Before TJOFLAT, WILSON, and JORDAN, Circuit Judges.

PER CURIAM:
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      Philip Long appeals the United States Tax Court’s final order and decision

on his petition for redetermination of deficiency brought under 26 U.S.C. §

6213(a). Long argues that the Tax Court erred by concluding that the $5.75

million Long received from the assignment of his position as plaintiff in a lawsuit

constituted taxable ordinary income, rather than long term capital gains. Long also

argues that the Tax Court erred by concluding that Long’s $600,000 payment to

Steelervest, Inc. (Steelervest) did not qualify as a deductible expense. Long further

argues that the Tax Court erred by concluding that Long presented insufficient

evidence of unaccounted legal fees.

                                                I.

      In October 2007, Long filed a federal income tax return for 2006, reporting a

taxable income of $0. In September 2010, the Internal Revenue Service (IRS)

served Long with a notice of deficiency, which indicated that Long had a taxable

income of $4,145,423 and had incurred $1,430,743 of tax liability in 2006. Long

filed a pro se petition in the Tax Court seeking a redetermination of his deficiency

on the grounds that he properly reported his taxable income and that the IRS made

several errors in calculating his cost of goods and gross receipts. The IRS’s answer

denied any error in the notice of deficiency.

      In October 2011, Long and the IRS executed a stipulation of facts and

exhibits, as required by the Tax Court, which the IRS supplemented three times


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thereafter. According to the stipulated facts, from 1994 to 2006, Long, as sole

proprietor, owned and operated Las Olas Tower Company, Inc. (LOTC), which

was created to design and build a luxury high-rise condominium called the Las

Olas Tower on property owned by the Las Olas Riverside Hotel (LORH). LOTC

never filed any corporate income tax returns and did not have a valid employer

identification number. Instead, Long reported LOTC’s income on his Schedule C

of his individual tax return.

      From 1997 to 2003, Long also owned Alhambra Brothers, Inc. (Alhambra),

which was created to build a different luxury condominium in Ft. Lauderdale,

Florida. To facilitate the building of the condominium, Alhambra formed

Alhambra Joint Ventures (AJV) with Steelervest, a company owned by Henry J.

Langsenkamp, III.

      In 1995, Steelervest entered into a contract to loan funds to LOTC for the

development of Las Olas Tower. In November 2001, Steelervest purchased

Long’s interest in AJV, and, as part of the deal (the AJV Agreement), Steelervest

agreed to forgive the loans previously issued to LOTC. As part of the same deal,

Long agreed to pay Steelervest $600,000 in the event that Long sold his interest in

the Las Olas Tower project, or twenty percent of the net profit resulting from the

development of the Law Olas Tower project.




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      In 2002, Long, negotiating on behalf of LOTC, entered into an agreement

with LORH (the Riverside Agreement) whereby LOTC agreed to buy land owned

by LORH for $8,282,800, with a set closing date of December 31, 2004. LORH

subsequently terminated the contract unilaterally and, on March 26, 2004, LOTC

filed suit in Florida state court against LORH for specific performance of the

contract and other damages. LOTC won at trial, and on November 21, 2005, the

state court entered judgment in favor of LOTC, and ordered LORH to honor the

Riverside Agreement and proceed with the sale of the land to LOTC within 326

days from the date of entry of the final judgment. LORH appealed the judgment.

      In August 2006, during the appeals process for the Riverside Agreement

litigation, Steelervest and Long renegotiated the terms of the AJV Agreement, and,

in a new agreement (the Amended AJV Agreement), Long agreed to pay

Steelervest fifty percent of the first $1.75 million, up to a maximum of $875,000,

of monies received by Long as a result of the Riverside Agreement litigation. On

September 13, 2006, Long entered into an agreement with Louis Ferris, Jr. (the

Assignment Agreement), whereby Long sold his position as plaintiff in the

Riverside Agreement lawsuit to Ferris for $5,750,000. While the Amended AJV

Agreement arguably entitled Steelervest to $875,000, Steelervest agreed to receive

$600,000 and release all rights to pursue collection under the Amended AJV

Agreement.


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      At the April 11, 2012 Tax Court trial, Long began his testimony by arguing

that the $600,000 payment to Steelervest was a deductible business expense, not a

non-deductible loan repayment. Long insisted that the $600,000 paid to

Steelervest could not have been a debt repayment, because all debts were

extinguished by the AJV Agreement.

      Long also testified that he began the Las Olas Tower project in 1995 when

he had the idea to build a luxury condominium in a prime real estate market. Long

claimed he intended to coordinate the development of the Las Olas Tower project,

and sought funding from his business partner and friend, Langsenkamp. Long

explained that he spent thirteen years working on the Las Olas Tower project, and,

in the end, he was able to sell his right to build the project.

      Next, Long proffered a letter from his attorneys as evidence of $238,343.71

in unaccounted legal fees, but the Tax Court refused to admit the letter as

inadmissible hearsay. The Tax Court then afforded Long the opportunity to

continue the trial so that Long could find the appropriate documentation regarding

his legal fees and present witnesses to properly authenticate those documents.

Long stated, however, that he was going to “give up” and “concede” the issue of

unreported legal fees because he had no way of getting admissible evidence before

the Tax Court in a timely fashion.




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      On cross-examination, Long testified that he was the developer of the Las

Olas Tower project, and his role was to design the property with an architect,

obtain local government approval for the project, and merchandise the property.

Long provided promotional material to potential clients, worked with clients to

execute contracts, and received deposits for approximately twenty percent of Las

Olas Tower’s sixty to ninety proposed condominium units. Long worked full-time

as the developer for the project.

      After Long’s testimony, the IRS called John McCrory, Steelervest’s and

Langsenkamp’s attorney, who testified that AJV and the Ft. Lauderdale

condominium project were losing enterprises, and Langsenkamp’s only hope of

making money was to have the loans Steelervest gave to LOTC repaid out of

profits from the Las Olas Tower project. The purpose of the AJV Agreement was

to cancel the notes issued to LOTC, and transfer Long’s indebtedness to profits

from the Las Olas Tower project. Essentially, the $600,000 was a substituted

obligation for the cancelled promissory notes.

      At the end of the trial, Long stated that his sole objection to the IRS’s

calculation of his 2006 tax liability was that his $600,000 payment to Steelervest

was a deductible business expense, not a loan repayment. Long also reiterated that

he agreed to give up on the additional legal fees. The IRS then noted its objection

to Long’s characterization of his 2006 income as capital gains.


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      Long stated in his post-trial brief that he should not have withdrawn his

claim regarding unaccounted legal fees, and argued that the IRS improperly

omitted $238,544 of deductible legal expenses from his 2006 tax return.

Additionally, the $600,000 payment to Steelervest did not constitute a loan

repayment because the controlling documents indicated that the AJV Agreement

eliminated all of Long’s debt. Long also asserted that his income from the

Assignment Agreement constituted the sale of an asset, and, therefore, his tax

return should be completed using the long term capital gains method.

      The IRS stated in its post-trial brief that the $600,000 payment to Steelervest

must have been a debt repayment because Steelervest was not a participant in a

joint venture with LOTC. The IRS also argued that the $5,750,000 received by

Long from the Assignment Agreement constituted ordinary income, not capital

gains. Specifically, Long received $5,750,000 in lieu of future ordinary income

payments, and, therefore, that money should be counted as ordinary income under

the “substitution for ordinary income doctrine.” See Comm’r v. P.G. Lake, Inc.,

, 

(1958). Additionally, Long was not entitled to an

increased legal fee deduction because, at trial, he presented no evidence

demonstrating his entitlement to an increased deduction, and, regardless, he

affirmatively abandoned the issue.




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      The Tax Court rejected Long’s arguments and found him liable for a tax

deficiency of $1,430,743. First, the Tax Court determined that Long’s concession

regarding the deductibility of additional legal fees amounted to a binding

stipulation that he was not entitled to an increased deduction. Moreover, even if

Long had not conceded the issue, he did not present sufficient evidence at trial

demonstrating his entitlement to an enhanced legal fee deduction. Second, based

on factors enumerated in previous published Tax Court decisions, the Tax Court

concluded that the AJV Agreement did not create a joint venture between

Steelervest and LOTC, and, therefore, the entire $5.75 million payment Long

received for his postion in the Riverside Agreement litigation constituted non-

deductible, taxable income attributable to Long, including the $600,000 that Long

subsequently paid to Steelervest. Finally, the Tax Court, treating LORH’s land as

the putative capital asset, found that Long intended to sell the land to a developer

and concluded that the applicability of the capital gains statute “depend[ed] on

whether Long intended to sell the land to customers in the ordinary course of his

business.” The Tax Court determined that, while Long only intended to sell the

land for the Las Olas Tower project, and not the individual condominium units

themselves, the $5.75 million payment for Long’s position in the lawsuit

nevertheless constituted ordinary income because Long intended to sell the land to

customers in the ordinary course of his business.


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                                           II.

      We review decisions of the Tax Court “in the same manner and to the same

extent as decisions of the district courts in civil actions tried without a jury.” 26

U.S.C. § 7482(a)(1). We review the Tax Court’s legal conclusions and

interpretations of the tax code de novo and its findings of facts for clear error.

Ocmulgee Fields, Inc. v. Comm’r, 

, 1364 (11th Cir. 2010).

Additionally, we may affirm on any ground that finds support in the record.

Thomas v. Cooper Lighting, Inc., 

, 1364 (11th Cir. 2007) (per

curiam).

                                                 III.

      Long argues that the $5.75 million he received from the Assignment

Agreement should be assessed as a long term capital gain rather than as ordinary

taxable income. Long notes that he only had an option to purchase LORH’s land

and the only asset he ever had in the Las Olas Tower project was the Riverside

Agreement.

      In response, the IRS argues that Long’s proceeds from the Assignment

Agreement were not a capital gain, but rather a lump sum substitution for the

ordinary income he would have earned from developing the Las Olas Tower

project. Thus, under the “substitute for ordinary income doctrine,” the $5.75

million lump sum payment was taxable as ordinary income. Additionally, in light


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of this analysis, the Tax Court’s discussion of factors to determine Long’s primary

purpose for holding the property was irrelevant. The IRS also argues that the

$5.75 million, which constitutes Long’s proceeds from the sale of his judgment, is

a short-term gain, because Long sold the judgment to Ferris on September 13,

2006, less than a year after the court entered judgment on November 21, 2005.

      Long did not file a reply brief.

                                          IV.

      Income representing proceeds from the sale or exchange of a capital asset

that a taxpayer holds for over a year is considered a capital gain and is taxed at a

favorable rate. Womack v. Comm’r, 

, 1298 (11th Cir. 2007). Other

income, or “ordinary income,” is taxed at a higher rate. 

‘capital

asset’ means property held by the taxpayer (whether or not connected with his

trade or business), but does not include . . . stock in trade of the taxpayer or other

property of a kind which would properly be included in the inventory of the

taxpayer if on hand at the close of the taxable year, or property held by the

taxpayer primarily for sale to customers in the ordinary course of his trade or

business.” 26 U.S.C. § 1221(a)(1). In certain circumstances, contract rights may

be capital assets. See Pounds v. United States, 

, 346 (5th Cir. 1967).

      This Court has observed that “the statutory definition of ‘capital asset’ has

never been read as broadly as the statutory language might seem to permit, because


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such a reading would encompass some things Congress did not intend to be taxed

as capital gains.” 

(second alteration in original)

(internal quotation marks omitted). “[T]he term ‘capital asset’ is to be construed

narrowly in accordance with the purpose of Congress to afford capital-gains

treatment only in situations typically involving the realization of appreciation in

value accrued over a substantial period of time. 

Court erred by misconstruing the “property” subject to capital gains

analysis under § 1221. The Tax Court analyzed the capital gains issue as if the

land subject to the Riverside Agreement was the “property” that Long disposed of

for in return for $5.75 million. The record makes clear, however, that Long never

actually owned the land, and, instead, sold a judgment giving the exclusive right to

purchase LORH’s land pursuant to the terms of the Riverside Agreement. In other

words, Long did not sell the land itself, but rather his right to purchase the land,

which is a distinct contractual right that may be a capital asset. See 

. The Tax Court erred by ignoring this distinction.

      This distinction is material because the “property” subject to the capital

gains analysis was really Long’s exclusive right to purchase the property pursuant

to the Florida court judgment. The dispositive inquiry is not “whether Long

intended to sell the land to customers in the ordinary course of his business,” but

whether Long held the exclusive right to purchase the property “primarily for sale


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to customers in the ordinary course of his trade or business.” See 1221(a)(1).

There is no evidence that Long entered into the Riverside Agreement with the

intent to assign his contractual rights in the ordinary course of business, nor is there

evidence that, in the ordinary course of his business, Long obtained the Florida

court judgment for the purpose of assigning his position as plaintiff to a third party.

Rather, the record makes clear that Long always intended to fulfill the terms of the

Riverside Agreement and develop the Las Olas Tower project himself.

      The IRS asserts two alternate grounds for affirming the Tax Court’s

decision.   First, the IRS incorrectly asserts that Long’s proceeds from the

Assignment Agreement constitute short-term capital gains. If the asset subject to

capital gains treatment was an assignment of litigation rights, then Long acquired

the asset when he filed suit in March of 2004, not when he obtained the judgment.

Additionally, the real asset at issue was Long’s exclusive right to purchase the

land, which he obtained pursuant to his execution of the Riverside Agreement in

2002, well over the one-year period required for long-term capital gains treatment.

See 

.

      Second, the IRS argues that Long’s proceeds from the Assignment

Agreement were a lump sum substitute for his future ordinary income, and under

the “substitute for ordinary income doctrine” the proceeds should be characterized

as ordinary income. We cannot agree.


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       “[T]he substitute for ordinary income doctrine is the only recognized judicial

limit to the broad terms of [§] 1221.” Tempel v. Comm’r, 

, 347

(2011) aff'd sub nom. Esgar Corp. v. Comm’r., 

(10th Cir. 2014).

Therefore, “when determining whether property is a capital asset under [§] 1221,

unless one of the eight exceptions or the substitute for ordinary income doctrine

applies it is a capital asset.” 

for ordinary income doctrine provides that when a party

receives a lump sum payment that “essentially [is] a substitute for what would

otherwise be received at a future time as ordinary income that lump sum payment

is taxable as ordinary income as well.” 

(internal

quotation marks omitted). The overall effect of the doctrine “has been to narrow

what a mechanical application of [§] 1221 would otherwise cause to be treated as a

capital asset.” 

       In determining whether a lump sum payment serves as a substitute for

ordinary income, we look to “the type and nature of the underlying right or

property assigned or transferred.” United States v. Woolsey, 

, 291

(5th Cir. 1963).1 A lump sum payment for a fixed amount of future earned income

is taxed as ordinary income. See, e.g., Hort v. Comm’r, 

, 30, 

        The Eleventh Circuit, sitting en banc, adopted as binding precedent all decisions
rendered by the Fifth Circuit prior to close of business on October 1, 1981. See Bonner v. City of
Prichard, 

, 1209 (11th Cir. 1981) (en banc).
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757, 757–58 (1941) (building owner’s receipt of lump sum payment in exchange

for cancelling a lease on his property constitutes ordinary income); 

(lottery winner’s receipt of lump sum payment in exchange for right

to future lottery winning disbursements constitutes ordinary income).

       It cannot be said that the profit Long received from selling the right to

attempt to finish developing a large residential project that was far from complete

was a substitute for what he would have received had he completed the project

himself. Long did not have a future right to income that he already earned. By

selling his position in the litigation, Long effectively sold Ferris his right to finish

the project and earn the income that Long had hoped to earn when he started the

project years prior. Taxing the sale of a right to create—and thereby profit—at the

highest rate would discourage many transfers of property that are beneficial to

economic development.

      Long possessed a “bundle of rights [that] reflected something more than an

opportunity…to obtain periodic receipts of income.” Comm’r v. Ferrer, 

, 130–31 (2d Cir.1962) (internal quotation marks omitted). Long’s profit was

not “simply the amount [he] would have received eventually, discounted to present

value.” 

. Rather, Long’s rights in the LORH property

represented the potential to earn income in the future based on the owner's actions

in using it, not entitlement to the income merely by owning the property. See 

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1302. We have already held that selling a right to earn future undetermined

income, as opposed to selling a right to earned income, is a critical feature of a

capital asset. United States v. Dresser Indus., Inc., 

, 59 (5th Cir. 1963).

The fact that the income earned from developing the project would otherwise be

considered ordinary income is immaterial. 

that the profit from the $5.75 million Long received in the sale of

his position in the Riverside Agreement lawsuit is more appropriately

characterized as capital gains.    The ruling of the Tax Court is reversed and

remanded with instructions to determine Long’s new tax liability in accordance

with this opinion.

                                         V.

      Long next argues that the Tax Court erred by not treating his $600,000

payment to Steelervest as a deductible “reduction of income.” Specifically, Long

contends the $600,000 was not a non-deductible loan repayment, but rather a

payment due as part of a stipulated profit participation agreement and, therefore,

was a “reduction of income and a deductible expense.”

      In response, the IRS argues that the AJV Agreement and Amended AJV

Agreement are debt instruments, and, as such, the $600,000 payment to Steelervest

constituted a non-deductible payment of indebtedness. Moreover, the IRS argues

that regardless of the characterization of the AJV Agreements, Long conceded that


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all of LOTC’s income flowed through him, and Long failed to identify any

provision of the tax code entitling him to deduct the $600,000.

      “When a taxpayer receives a loan, he incurs an obligation to repay that loan

at some future date.” Comm’r v. Tufts, 

, 307, 

, 1831

(1983). “Because of this obligation, the loan proceeds do not qualify as income to

the taxpayer.” 

taxpayer] fulfills the obligation, the repayment of

the loan likewise has no effect on his tax liability. 

under the Internal Revenue Code are a matter of

legislative grace and the taxpayer who claims the benefit must bear the burden of

proof that he is entitled to the particular deduction.’ O’Neal v. United States, 

, 1276 (11th Cir. 2001). As such, the taxpayer “must ‘clearly establish’

his entitlement to a particular deduction.” Anselmo v. Comm’r, 

,

1211 n.2 (11th Cir. 1985).

      Throughout the proceedings in the Tax Court, Long never made clear

whether his argument was that (1) the $600,000 paid to Steelervest was its profit

share of a joint venture with LOTC (meaning, of the $5.75 million Long received

from the Assignment Agreement, only $5.15 million was his actual income), or (2)

the entirety of the $5.75 million was Long’s income, but the $600,000 paid to

Steelervest qualified as a deductible expense. Long concedes in his opening brief

that he did not participate in a joint venture with Steelervest, and, therefore, the


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entirety of the $5.75 million in proceeds from the Assignment Agreement was

attributable to Long’s income. Accordingly, the issue on appeal is whether the

$600,000 Long paid to Steelervest qualified as a deductible expense.

      Here, the Tax Court committed no error because Long did not meet his

burden of clearly establishing his entitlement to deduct the $600,000 paid to

Steelervest. See 

; 

n.2. The

record demonstrates that the nature and character of the Amended AJV Agreement

was to renegotiate Long’s repayment terms with respect to his indebtedness to

Steelervest. Accordingly, the $600,000 was a loan repayment that does not qualify

as a deductible expense. See 

, 103 S. Ct. at 1831. Moreover,

regardless of the characterization of the Amended AJV Agreement, Long provides

no statutory support for his contention that LOTC’s alleged “profit participation”

with Steelervest constitutes a deductible expense. Accordingly, Long has not met

his burden of clearly establishing his entitlement to a particular deduction, and the

judgment of the Tax Court on this issue is affirmed.

                                         VI.

      Finally, Long argues that the Tax Court erred by refusing to include over

$200,000 in unreported legal fees in its assessment of his deficiency. He argues

that a letter from his attorneys was sufficient to demonstrate the existence of the

unreported legal fees. Moreover, Long argues he was tricked into abandoning his


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claim by the Tax Court, and that counsel for the IRS behaved unethically by failing

to disclose that the evidence offered by Long was hearsay.

      In response, the IRS argues that the Tax Court correctly determined that

Long’s proffered evidence of additional legal fees was both inadmissible and

insufficient to demonstrate his entitlement to a higher deduction.

      We have repeatedly held that we will not consider issues on appeal that a

party expressly abandoned at trial. See, e.g., Midrash Sephardi, Inc. v. Town of

Surfside, 

, 1222 n.8 (11th Cir. 2004). This Court reviews claims of

judicial error in the lower courts, and if we were to regularly address questions that

a lower court never had a chance to examine, it would not only waste court

resources, but “also deviate from the essential nature, purpose, and competence of

an appellate court.” Access Now, Inc. v. Sw. Airlines Co., 

, 1331

(11th Cir. 2004).

      The taxpayer carries the burden of demonstrating with some substantiality

how much of a deductible expense was actually paid or incurred. Williams v.

United States, 

, 560 (5th Cir. 1957). It is a basic requirement that the

petitioner present sufficient evidence that a deductible expense was, in fact, spent

or incurred for the stated purpose. See 

proceedings are conducted in accordance with the Federal Rules

of Evidence applicable in a trial without a jury. Comm’r v. Neal, 

,


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1272 n.9 (11th Cir. 2009) (citing 26 U.S.C. § 7453). Hearsay is defined as a

statement, other than one made by the declarant while testifying at the trial or

hearing, offered in evidence to prove the truth of the matter asserted. Fed. R. Evid.

801(c). Absent an exception, hearsay is not admissible. See Fed. R. Evid. 802.

      As an initial matter, Long’s explicit abandonment of this issue at trial would

typically prevent appellate review because the Tax Court would not have made a

final ruling. See Midrash Sephardi, 

n.8; Access Now, 

. However, Long re-raised the issue in his post-trial brief, and the

Tax Court ultimately addressed the merits of Long’s argument in its final decision.

Accordingly, this Court may review whether the Tax Court erred by concluding

that Long did not present sufficient evidence of unaccounted legal fees.

Additionally, the record contains no evidence of unethical behavior by the Tax

Court or IRS counsel, and, regardless, we need not consider issues of alleged

impropriety because Long raises them for the first time on appeal. See Access

Now, 

.

      Here, the Tax Court correctly concluded that Long’s evidence of

unaccounted legal fees was insufficient. Long’s sole piece of evidence regarding

the unaccounted legal fees, a letter from his attorneys indicating that certain fees

were paid, constitutes inadmissible hearsay, because the writer of the letter did not




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testify in court or otherwise authenticate the document. 2 See Fed. R. Evid. 801(c),

802. Accordingly, having presented no other evidence, Long did not present

sufficient evidence of a deductible expense. See 

.

Therefore, the judgment of the Tax Court on this issue is affirmed.

       AFFIRMED in part, REVERSED in part, and remanded with instructions

for further proceedings.




       2
         While the attorney’s letter may have been admissible as a business record under Fed. R.
Evid. 803(6), Long makes no such argument in his opening brief and, therefore, this Court need
not consider the issue. See Holland v. Gee, 

, 1066 (11th Cir. 2012).
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