T.C. Memo. 2019-98



                        UNITED STATES TAX COURT



      KENT ALAN WEGENER AND SHINAE WEGENER, Petitioners1 v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 26163-16.                         Filed August 6, 2019.



      Kent Alan Wegener, pro se.

      Brian A. Pfeifer and Sharyn M. Ortega, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      GOEKE, Judge: Respondent determined income tax deficiencies against

Kent Alan Wegener (petitioner) and his wife Shinae Wegener for 2011, 2012, and

2013 (years at issue) of $170,953, $98,573, and $21,108, respectively, additions to


      1
        On September 14, 2018, respondent moved to dismiss Shinae Wegener as a
petitioner for failure to prosecute. We granted respondent’s motion.
                                          -2-

[*2] tax for failure to file a timely return under section 6651(a)(1) for 2011 and

2012 of $24,383 and $18,968, respectively, and accuracy-related penalties under

section 6662(a) for 2011, 2012, and 2013 of $34,191, $19,715, and $4,222,

respectively.2 Respondent disallowed business expense deductions claimed on

Schedule C, Profit or Loss From Business, for each year at issue on the basis that

the expenses were not ordinary and necessary business expenses and, alternatively,

petitioner did not substantiate the amounts or payment of the expenses.

      Following concessions the issues remaining for decision are: (1) whether

petitioner is entitled to the disallowed business expense deductions; we hold he is

not; and (2) whether petitioner is liable for additions to tax for failure to timely file

for 2011 and 2012; we hold he is.3

                                FINDINGS OF FACT

      When petitioner timely filed the petition, he resided in California. The

record consists of a stipulation of facts, accompanying exhibits, and trial



      2
       Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) as amended and in effect at all relevant times, and all Rule
references are to the Tax Court Rules of Practice and Procedure. All amounts are
rounded to the nearest dollar.
      3
       Respondent conceded the sec. 6662(a) penalties for 2011, 2012, and 2013.
Petitioner conceded that he received and failed to report $23,026 of cancellation of
indebtedness income in 2013.
                                        -3-

[*3] testimony. Petitioner has a master of business administration degree and has

worked in corporate finance for over three decades. He began his career at

General Electric, where he worked for 18 years and assisted with a number of

international finance projects. After leaving General Electric he worked in

corporate finance for several other companies including Otis Spunkmeyer (Otis),

where he served for 14 years as a vice president of finance. During the years at

issue he worked for Otis, receiving an annual salary of over $200,000, and lived in

California.

      Petitioner and his wife filed joint returns for the years at issue and claimed

net loss deductions attributable to Schedule C activities for “Kent’s Cocoa llc”

(Kent’s Cocoa). Despite the name petitioner did not organize a limited liability

company. For each year at issue petitioner reported that Kent’s Cocoa had no

gross receipts and claimed business expense deductions that are the primary

subject of this dispute. Petitioner filed one Schedule C for each year at issue and

reported his principal business activity was acting as a merchant wholesaler of

farm product raw materials. However, he deducted amounts attributable to two

separate, unrelated activities: cocoa farming in the Republic of Ghana (Ghana)

and aiding African refugees from Ghanaian refugee camps to immigrate to the
                                         -4-

[*4] United States including the purported physical transfer of the refugee’s

money and other assets to the United States (rescue services).

A.    Cocoa Farming

      Petitioner had no prior experience with cocoa farming. He first learned

about cocoa farming through his employment at Otis, where he was involved in

procurement including the procurement of chocolate (produced from cocoa beans)

for Otis’ baked goods products. In 2007 he began to correspond online with

individuals from Ghana about cocoa farming and the cocoa bean bureaucracy in

Ghana including the Ghana Cocoa Board, an extension of the Ghanaian

Government. He understood that the Ghana Cocoa Board oversaw the process of

insecticide treatments for cocoa crops and operated distribution centers through

which farmers sold their cocoa beans.

      Petitioner’s primary means of contact with the farmers was through online

chatting and email. However, he traveled to Ghana on multiple occasions and met

with members of the Ghana Cocoa Board, farmers, and a lawyer. At times he was

suspicious of the individuals he was in contact with online. He performed due

diligence including verifying the farmers’ identities, the history of their farming

activities, the financial conditions of the farms, ownership of the farms, and the

market values of the land. He sought to enter into business ventures with farmers
                                         -5-

[*5] who were unable to pay previously incurred operating expenses and wages

and lacked funding to harvest their current cocoa bean crops, believing that with

better management the farms could become profitable.

      From October 2009 to October 2010 petitioner entered into at least eight

written partnership agreements with Ghanaian farmers. Each agreement was to

“form a limited partnership pursuant to the provisions of the Republic of Ghana”

and governed by the laws of Ghana (partnership agreements). Had the Ghanaian

partnerships engaged in a trade or business, they would have been foreign

partnerships under section 7701(a)(4) and (5) and would not have been required to

file U.S. returns of partnership income.4 See sec. 6031(e). Under the agreements

the farmers agreed to transfer their assets to the partnerships including land,

improvements, unharvested crops, and inventories of salable farm products, and

petitioner agreed to make capital contributions to the partnerships ranging from

$2,500 to $25,000. At times the agreements were executed after petitioner already

had transferred money to the farmers. Petitioner also agreed to lend additional

money to the partnerships. The agreements required the partnerships to repay the

      4
        A foreign partnership that is not required to file a U.S. return is not subject
to the provisions of TEFRA. Sec. 6231(a)(1). We refer to the farms as
partnerships for convenience and reach no conclusions regarding whether the
partnerships or partnership agreements were valid or whether the partnerships
engaged in a trade or business.
                                         -6-

[*6] loans before calculating and distributing profits to petitioner and the farmers.

Under the agreements petitioner received 50% ownership interests in the farms

and a right to 50% of the farms’ future profits. The agreements provided that the

farmers would register the land in both petitioner’s and the farmer’s names.

       The farmers continued to manage the farms’ day-to-day operations and had

the right to receive salaries if the farm profits were sufficient for their payment.

The partnerships also engaged local business managers with annual salaries

ranging from $15,000 to $36,000. The partnership agreements stated that the

partnerships were obligated to pay the business managers’ salaries; however,

petitioner paid portions of the salaries himself. Under the terms of the partnership

agreements, with limited exception, petitioner had the right to select the business

managers. Some partnership agreements named the business managers and stated

their salaries.

       Petitioner’s primary activity with respect to the farming portion of his

Schedule C activity was transferring funds to the farmers for their use including

uses unrelated to farming. The farmers represented to petitioner that they used the

money for their living expenses, transportation of cocoa beans to distribution

centers, bribes to have their farms treated with insecticide, which was in short

supply, medical expenses of the farmers’ relatives, and bail for farmers who were
                                       -7-

[*7] arrested for failing to pay their debts such as back wages or amounts owed to

the Ghanaian Government. On Schedules C petitioner denoted amounts

transferred to the Ghanaian farmers as “monies invested in partnerships”:

$543,084, $233,396, and $24,513 for 2011, 2012, and 2013, respectively. These

amounts included the amounts that petitioner treated as loans and expected

repayment of. He also deducted expenses that he personally incurred such as

office supplies, banking and money transfer fees, and car expenses.

      The partnership agreements provided that the business managers were

primarily responsible for maintaining the books and records of the farms.

However, the business managers often did not keep records. Neither the farmers

nor the managers provided documentation to petitioner. At times, the farmers

provided written summaries via email of their activities and expenses.

B.    Rescue Services

      Petitioner also deducted business expenses related to his purported rescue

services on Schedules C for “monies spent to enter new line of business” of

$28,065 and $3,950 for 2011 and 2012, respectively. The Ghanaian Government

and the United Nations High Commission for Refugees (UNHCR) established

refugee camps in Ghana for persons fleeing conflict and political turmoil in

neighboring west African countries. Persons representing themselves as diplomats
                                        -8-

[*8] or officials working with the UNHCR contacted petitioner online and asked

him to help families from the refugee camps immigrate to the United States.

Petitioner’s principal means of contact with these individuals was online. He

believed that the refugees were former members of an overthrown government or

executives of a large diamond company.

      As part of the rescue services, the contacts represented to petitioner that the

refugee families had substantial wealth and needed assistance with physically

transferring their wealth to the United States. The contacts further represented that

petitioner would receive a substantial portion of the families’ wealth upon their

immigration to the United States as compensation for his assistance. Petitioner

transferred his own money to his contacts for the purported purpose of paying the

expenses incurred to physically transfer the refugees’ money to the United States

through the delivery and consignment of metal trunks containing cash and/or other

assets. He received correspondence with letterheads from the U.S. Customs and

Border Protection Services, the United Nations General Assembly, the U.S.

Department of Homeland Security, various ministries within the Ghanaian

Government, and airport security or storage facilities in California, among others.

He received certificates labeled as from the World Bank, the International

Monetary Fund, and the Supreme Court of Florida, among others. Petitioner never
                                        -9-

[*9] helped anyone successfully immigrate to the United States and did not receive

any payment for his services or repayment of the amounts he had advanced. Over

the course of at least one year he received emails identifying a series of new

obstacles to the delivery of the refugees’ money and seeking additional funds

allegedly needed to overcome these obstacles to the delivery. Eventually,

petitioner told his contacts that he did not have any funds left to advance.

      Petitioner began transferring funds to Ghana around 2010; he transferred

$187,000 in 2010. He used his salary (over $200,000 annually) and distributions

from his individual retirement account (IRA) for the advances. He reported

$490,463 in taxable IRA distributions, $47,044 in taxable pension and annuity

distributions, and $44,576 in nontaxable pension and annuity distributions on his

tax returns for the years at issue. He made wire transfers and incurred wire

transfer fees for the years at issue as follows: $524,000 in wire transfers and

$10,500 in fees for 2011, $145,000 in wire transfers and $3,600 in fees for 2012,

and $21,000 in wire transfers and $1,000 in fees for 2013.

C.    Schedule C Expenses

      Petitioner claimed business expense deductions on his Schedules C, which

respondent disallowed in their entirety, as follows:
                                        - 10 -

 [*10] Expense                  2011                2012                2013
 Car and truck                    ---                 $110               $333
 Contract labor                $33,276               2,000                ---
 Depreciation                     ---                       30            ---
 Nonmortgage interest             5,000             15,000               1,000
 Legal and professional
  services                       25,000             27,900               4,460
 Office                           1,000                500                 200
 Rent or lease of other
  business property              19,000             19,000               3,200
 Supplies                           385               ---                ---
 Travel                           5,500              6,000                 890
 Utilities                        5,000             19,000             13,000
 Banking fees                     2,000                450                 250
 Money transfer fees             11,500              8,440               1,422
 Money invested in
  partnerships                 543,084             233,396              24,513
 Money spent to enter
  new line of business           28,065              3,950                ---
  Total                        678,810             335,776             49,268

      Respondent disallowed the claimed business expense deductions on the

basis that they were not for ordinary and necessary business expenses and

alternatively that petitioner did not substantiate the amounts or payment of the
                                        - 11 -

[*11] expenses.5 Petitioner and his wife filed their 2011 and 2012 joint tax returns

late on January 26, 2015, and December 9, 2014, respectively. Petitioner prepared

the returns. He offered no explanation for their late filing.

                                      OPINION

      Deductions are a matter of legislative grace, and the taxpayer bears the

burden of proving he is entitled to claimed deductions. Rule 142(a); INDOPCO,

Inc. v. Commissioner, 

, 84 (1992). Generally, the Commissioner’s

determinations in a notice of deficiency are presumed correct, and the taxpayer has

the burden of proving the determinations are in error. Welch v. Helvering, 

, 115 (1933). To that end, a taxpayer must maintain records sufficient to

allow the Commissioner to determine his correct tax liability. Sec. 6001; sec.

1.6001-1(a), Income Tax Regs. A taxpayer also bears the burden to substantiate

the amount and purpose of an expense underlying any claimed deduction. Higbee

v. Commissioner, 

, 440 (2001).




      5
        We do not address the issue of substantiation. We further note that it was
petitioner that allegedly paid the amounts that he deducted in connection with the
farming activity, not the Ghanaian partnerships. Significant portions of the
deducted amounts were the amounts he transferred as loans and banking and wire
transfer fees. Petitioner asserted that the amounts he transferred to the farmers
were loans that he hoped would be repaid.
                                        - 12 -

[*12] I.     Schedule C Deductions

      A taxpayer is entitled to deduct all ordinary and necessary expenses paid or

incurred during the taxable year in carrying on a trade or business or for the

production or collection of income. Secs. 162(a), 212(1). Ordinary expenses are

ones that arise by virtue of common or frequent occurrences in the taxpayer’s

business, and necessary expenses are ones that are appropriate and helpful for the

development of the business. Commissioner v. Tellier, 

, 689 (1996);

Deputy v. du Pont, 

, 495 (1940).

      This case presents a threshold question for the Schedule C business expense

deductions: whether petitioner was engaged in a trade or business or an activity

for the production of income with respect to his involvement in the Ghanaian

farms or the rescue services that could give rise to deductible expenses under

section 162 or 212(1).6 Respondent argues that petitioner was not engaged in a

trade or business or an activity for the production of income. We find that

petitioner did not engage in a trade or business or an activity for the production of

income.




      6
       Neither party asserts that the expenses are expenses of the foreign
partnerships. Thus, we focus on whether petitioner in his capacity as an individual
taxpayer may deduct any of the expenses in dispute.
                                         - 13 -

[*13] A.     Trade or Business

      The Code provides no definition for a trade or business. The Supreme

Court has stated: “[T]o be engaged in a trade or business, the taxpayer must be

involved in the activity with continuity and regularity and * * * the taxpayer’s

primary purpose for engaging in the activity must be for income or profit.”

Commissioner v. Groetzinger, 

, 35 (1987). The question of whether a

taxpayer is engaged in a trade or business is inherently factual and “facts vary”.

For the Court to answer that question in the affirmative the taxpayer

must satisfy three requirements: (1) he undertook the activity intending to earn

profit; (2) he is regularly and actively involved in the activity; and (3) the activity

has actually commenced. Jafarpour v. Commissioner, T.C. Memo. 2012-165, slip

op. at 14. Failing to meet any one of these three prongs is dispositive and means

that the taxpayer was not engaged in a trade or business. 

at 15.

      For regular and active involvement to give rise to a trade or business, the

taxpayer must show extensive business activity over a substantial period. 

hobbies, and amusement diversions are not enough to establish

a trade or business. Commissioner v. 

. When

determining whether a taxpayer’s involvement is regular and active, we consider

whether he devoted time to another job. Jafarpour v. Commissioner, slip op. at 15.
                                        - 14 -

[*14] The taxpayer’s management of his own investments is generally not a trade

or business. Whipple v. Commissioner, 

, 200 (1963); Hatcher v.

Commissioner, T.C. Memo. 2016-188, at *12, aff’d, 726 F. App’x 207 (5th Cir.

2018).

             1.     Cocoa Farming

      Petitioner has not established that he was sufficiently regularly and actively

involved in cocoa farms’ operations for it to constitute a trade or business, and it

seems improbable that he could have been, given the fact that the farms were

across the world and he worked full time as a vice president at Otis. Rather, he

made financial investments in the farms to acquire half of the farmers’ assets and

lent money to the farmers. Under the partnership agreements, he received 50%

ownership of the land and other assets and the right to 50% of future profits. He

invested in farms that were unable to pay their expenses and did not have

sufficient funding to harvest their current crops. He believed that with better

management the farms could be profitable. The farmers continued to manage the

day-to-day operations, but the farms also engaged a business manager often

chosen by petitioner. Petitioner’s limited involvement in the farms, primarily

wiring money to individuals in Ghana, does not rise to the level of the regular and
                                        - 15 -

[*15] active involvement required to establish a trade or business and deductible

business expenses under section 162.

      Even if petitioner could establish that his activities constituted a trade or

business, he has another problem. He stated that the bulk of his deducted

expenses were in fact loans that he expected to be repaid. Transfers made with the

expectation of repayment are loans, and we have repeatedly held that they are not

deductible business expenses. See Herrick v. Commissioner, 

, 567

(1975); Canelo v. Commissioner, 

, 224 (1969), aff’d per curiam, 

, 485 (9th Cir. 1971). This is true even where the prospect of repayment

is doubtful. Merritt v. Commissioner, T.C. Memo. 2003-187, slip op. at 9.

Therefore, even if petitioner had established a trade or business, he would not be

entitled to deduct the loans under section 162.

      Finally, petitioner did not present any documentation of the farms’

expenses. He testified that the farmers used the loans for their living expenses,

medical expenses, insecticide treatments, transportation costs, bail, and bribes.7

However, he did not receive any receipts or other documentation from the farmers

      7
         The farmers purportedly paid bribes to obtain priority for insecticide
treatment because there was not enough insecticide to spray all farms. These sorts
of illicit payments may be commonplace in other parts of the world and a
necessary cost of doing business, but the Code prohibits their deduction. Sec.
162(c)(1).
                                        - 16 -

[*16] or business managers. We do not consider how the farmers used the loans.

We are not reviewing the tax years of the foreign partnerships; we are

redetermining petitioner’s tax liabilities as reported on his returns and the

expenses deducted on Schedules C.

             2.     Rescue Services

      Petitioner has not shown that he had regular and active involvement with his

rescue services and, therefore, has not established that they constitute a trade or

business. His rescue service activities consisted solely of wiring money to

individuals involved in the refugee scheme in exchange for a larger sum of money

to be paid to him later; no money ever arrived. One individual involved in the

scheme to whom petitioner had transferred over $140,000 testified at trial via

telephone. Petitioner represented that the witness was out of the country and

needed to participate by phone. However, during the trial we learned that the

witness was in California but he refused to give his exact location to the Court.

We find the witness’ testimony evasive, unreliable, and lacking any credibility.

Petitioner has not shown any regular and active involvement in the rescue service

activities. He sent sums of money to unknown persons hoping for a windfall at

some point in the future. He appears to be the victim of a scam. We sympathize
                                         - 17 -

[*17] for his situation, but such activity is not a trade or business that gives rise to

deductible expenses.

      B.     Production of Income

      As an alternative position, petitioner argues that his expenses in the farming

and rescue services activities are deductible under section 212(1) as ordinary and

necessary expenses incurred or paid for the production or collection of income.

To deduct expenses under section 212(1) petitioner must establish that he engaged

in the activity with the “predominant, primary or principal objective” to realize a

profit. Novak v. Commissioner, T.C. Memo. 2000-234, slip op. at 10; see Wolf v.

Commissioner, 

, 713 (9th Cir. 1993), aff’g T.C. Memo. 1991-212; Allen

v. Commissioner, 

, 33 (1979) (holding that a taxpayer must engage in

an activity predominantly to make a profit); see also sec. 183(a), (c) (disallowing

deduction of expenses attributable to activities not engaged in for profit, defined

as expenses other than those deductible under section 162 or 212).

      Factors we consider in determining whether a taxpayer had the requisite

primary profit intent include: (1) the manner in which the taxpayer carried on the

activity, (2) his expertise, (3) the time and effort that he expended in carrying on

the activity, (4) the expectation that assets used in the activity may appreciate in

value, (5) the taxpayer’s success in carrying on other similar or dissimilar
                                        - 18 -

[*18] activities, (6) the activity’s history of income or loss, (7) the amount of

profit, if any, (8) the taxpayer’s financial status, and (9) any elements of personal

pleasure or recreation involved. Sec. 1.183-2(b), Income Tax Regs. No single

factor is conclusive, and we may accord certain factors greater weight than others.

Golanty v. Commissioner, 

, 426 (1979), aff’d without published

opinion, 

(9th Cir. 1981); Allen v. Commissioner, 

.

      Each of these factors weighs against petitioner with respect to both the

farming and the rescue services. He engaged in the activities primarily through

email and online chat services. He had no expertise in cocoa farming, helping

persons immigrate, or transporting large sums of money into the United States.

His full-time job limited his ability to be regularly and actively involved in either

activity. The activities were structured so that he would have to invest minimal

time and effort. His contribution was almost exclusively financial. He had no

expectation that the farm’s real estate would appreciate in value. He had no

success at these or any similar activities; he had no income for the years at issue

from these activities and no profit. Petitioner had a substantial IRA and earned an

annual salary of over $200,000. It appears his finances suffered as a result of his

activities; he reported over $500,000 in IRA and pension distributions for the

years at issue. Finally, the record suggests a personal relationship with some
                                        - 19 -

[*19] Ghanaian farmers, indicating elements of personal pleasure or recreation.

We find that petitioner did not engage in his cocoa farming or rescue service

activities with the primary purpose and intent of making a profit.

      C.     Conclusion

      Petitioner was not regularly and actively involved in his cocoa farming or

rescue services activity. Nor did he engage in these activities with the primary

purpose and intent of making a profit. His activities did not give rise to a trade or

business for the deduction of expenses under section 162. His alternative position

of deductibility under section 212 for the production or collection of income is

also without merit. Accordingly, we sustain respondent’s determination to

disallow the claimed Schedule C expense deductions.

II.   Section 6651(a)(1) Additions to Tax for Failure to Timely File

      Section 6651(a)(1) imposes an addition to tax for failing to file a timely tax

return. Respondent determined that petitioner is liable for additions to tax for

failing to timely file his 2011 and 2012 returns. Respondent has the burden of

production and must present sufficient evidence to show the addition to tax is

appropriate. Higbee v. Commissioner, 

. A taxpayer can avoid the

addition to tax if he can show the failure to timely file was due to reasonable cause

and not willful neglect. Sec. 6651(a)(1). The taxpayer, however, retains the
                                        - 20 -

[*20] burden of proving that he had reasonable cause. Higbee v. Commissioner,

-447. The parties have stipulated that petitioner filed his joint

returns for 2011 and 2012 late on January 26, 2015, and December 9, 2014,

respectively. Accordingly, respondent has met his burden of production.

Petitioner presented no evidence to show reasonable cause for his late filings.

Therefore, respondent’s determinations are sustained.

         In reaching our holding, we have considered all arguments made, and, to the

extent not mentioned above, we conclude they are moot, irrelevant, or without

merit.


                                                      Decision will be entered under

                                                 Rule 155.