T.C. Memo. 2017-20



                           UNITED STATES TAX COURT



              SCOTT KIMREY GOLDSMITH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

            GOLDSMITH & ASSOCIATES, LTD., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 13335-12, 14342-12.             Filed January 26, 2017.



      Scott Kimrey Goldsmith, pro se in docket No. 13335-12.

      Scott Kimrey Goldsmith (an officer), for petitioner in docket No. 14342-12.

      David L. Zoss, John Schmittdiel, Julie A. Schwoebel, and Jeremy J.

Eggerth, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      HOLMES, Judge: Goldsmith & Associates was a small law firm with a big

accounting problem. Scott Goldsmith was its owner, and his tax troubles
                                        -2-

[*2] eventually led to prison. Now we have to sort through the records--the few

that exist--to decide several issues from his and his firm’s 1999-2002 tax years.

                               FINDINGS OF FACT

      Mr. Goldsmith practiced law for almost 30 years. He spent the early years

of his career working as a litigator for the Minneapolis firm of Rider Bennet.

After fourteen years there he moved to another Minneapolis firm, Popham Haik.

After Popham Haik merged with another firm in 1997, Mr. Goldsmith decided to

set out on his own and formed Goldsmith & Associates, Ltd. (G&A), a Minnesota

corporation treated as an S corporation for federal tax purposes.1 G&A first

operated out of Mr. Goldsmith’s home, but eventually moved to conventional

office space. Mr. Goldsmith was its sole shareholder and officer, but he had four

associates working for him.

A.    G&A’s Chaotic Accounting Records

      G&A had problems from the start. Mr. Goldsmith had a clear vision of the

type of law he wanted to practice, but he was a self-proclaimed micromanager

      1
         An S corporation is a corporation governed under the laws of subchapter
S of the Internal Revenue Code. S corporations are not generally subject to
Federal income tax but like partnerships are conduits through which income flows
to their shareholders. See Gitlitz v. Commissioner, 

, 209 (2001)
(“Subchapter S allows shareholders of qualified corporations to elect a
‘pass-through’ taxation system under which income is subjected to only one level
of taxation”).
                                        -3-

[*3] without the know-how to manage. He testified that he had “no personal

experience, education or background in accounting or the operation of a business

or financial background.” He “micromanaged virtually about everything and * * *

did not have the clarity of vision to * * * try to see how things should run.” He

did not keep sufficient accounting records, and for the first four months of G&A’s

existence, he didn’t even keep company funds in a corporate account. He kept

track of cashflow and expenses on a legal pad, but the legal pads would pile up.

Chaos ensued, and Mr. Goldsmith hired a CPA to set up a better way to keep

books and records. The investment proved to be a poor one: The firm’s records

were entered into software that didn’t make them usable to Mr. Goldsmith or his

associates. The CPA was expensive, and the pressure on G&A’s cashflow began

to build.

      The firm did have a fair number of clients, but it mostly worked on

contingency. When a contingent-fee firm has good business, it can pile up costs

much more rapidly than offsetting fees. And that’s what began to happen at G&A.

The firm had no credit and was unable to get a loan from a bank. Without much

money coming in, Mr. Goldsmith was forced to fund its operations by taking out

mortgages on his personal residence. During the years at issue he used the

proceeds to make at least thirteen advances to G&A. For each advance he would
                                        -4-

[*4] draft a contract between G&A and himself that detailed repayment terms and

the consequences of a default. Mr. Goldsmith poured money into the business and

didn’t always pay his personal bills. By late 1999 one of the two mortgages on his

residence went into default, and the house entered foreclosure. Mr. Goldsmith

credibly testified that he thought he’d hit bottom when he traveled to Florida to

represent a client in a difficult race-discrimination case. After more than a week

of trial he ended up with a hung jury. He’d used every last penny he had getting to

Florida and was stuck at a motel in Tampa with no money to pay the bill or buy an

airline ticket home. It took two weeks, but he managed to find someone willing to

lend him $2,500 so he could return to Minnesota.

      Then his luck turned.

      Or at least it seemed to.

B.    The Windfall Contingent Fee

      After he struggled to get back home, a massive settlement from an old

antitrust case came through. G&A got a fee of $880,000. Mr. Goldsmith took the

full amount as a distribution from G&A, wrote a $700,000 check to redeem his

personal residence from foreclosure, and put what was left back into the firm.

This decreased the firm’s debt to him and so reduced his aggregate basis in G&A

stock. Within a month, though, G&A was sinking again. By August 2000 it
                                       -5-

[*5] didn’t have enough money to make payroll, and Mr. Goldsmith again began

eyeing the newly restored equity in his home.

C.    The End of G&A

      Mr. Goldsmith looked for help from a two-person operation that lent money

against a borrower’s personal credit at higher than average interest rates--much

higher interest rates. Legal loan-shark interest rates. This time G&A took out a 5-

year loan for $200,000 with an 18% interest rate. The loan was guaranteed by Mr.

Goldsmith and his wife, who again mortgaged their residence to secure the loan.

Within two months, the money was gone. In November 2000 G&A borrowed an

additional $100,000 at 18%. Again the note was guaranteed by Mr. Goldsmith

and his wife.

      That money lasted until March 2001. When it ran out, G&A borrowed

another $50,000. But this loan was for a term of less than a year and with an

interest rate of 5% per month. The next month G&A borrowed another $25,000

under the same terms. This could not go on, and Mr. Goldsmith was about to learn

the truth of the old adage that a synonym of usury is ruin. Two things happened:

By August 2001 the money had run out again, and all but one of G&A’s associates

left when G&A could not meet payroll. By January 2002, even the straggler lost

hope, and Mr. Goldsmith was left with a workload meant for five attorneys. Then
                                         -6-

[*6] his secretary left and his office lease ended. Unable even to afford

professional movers, Mr. Goldsmith packed up his records and eventually moved

G&A to the basement of his home. The move did not improve the organization of

G&A’s records.

      Mr. Goldsmith just couldn’t keep up with the work. He tried to set his

clients up with other attorneys, but it never made a difference. Cashflow dropped

to a trickle, and by early 2002 Mr. Goldsmith had defaulted on all four of the high-

interest loans. Two creditors foreclosed on his residence, and he and his wife were

evicted in May 2002. He and his wife were left with only redemption rights in

their home.

      In a last effort to save it, he contracted with yet another lender on yet

harsher terms. Believing he had equity in his home, Mr. Goldsmith and his wife--

not G&A--contracted with Eric Mitchell. Mr. Mitchell promised to use the

Goldsmiths’ redemption rights to buy the property and according to Mr.

Goldsmith gave him a chance to buy it back later in exchange for $300,000 plus

the cost of redemption. After the deal closed Mr. Mitchell held title to the

property, but he at least gave Mr. Goldsmith and his wife permission to live there.

The home was worth about $1.5 million, and Mr. Mitchell redeemed it for

$600,000--which according to Mr. Goldsmith meant it would cost almost
                                        -7-

[*7] $900,000 to buy it back.2 But there was no salvation in this redemption:

G&A continued to spiral downward, and Mr. Goldsmith’s license to practice law

was suspended by the Minnesota Lawyers Board of Professional Responsibility in

May 2004.

D.    Criminal Investigation and Imprisonment

      In June 2005 Mr. Goldsmith was indicted on twelve counts under section

72023 for failing to account for and pay over federal income and FICA taxes

withheld from employees for the 1999, 2000, 2001, and 2002 tax years; and four

counts under section 7203 for failing to file individual income returns for the

1999, 2000, 2001, and 2002 tax years. A plea of nolo contendere led to a

judgment against him for all sixteen counts. He was sentenced to 33 months of

imprisonment followed by three years of supervised release. See United States v.

      2
        There’s limited documentation on the deal in the record, and we have only
Mr. Goldsmith’s testimony that he was on the hook for a $300,000 payment.
There is no evidence that shows whether and how Mr. Goldsmith bought the
property back from Mr. Mitchell. We have only the lease allowing Mr. Goldsmith
and his wife to stay on the property, the real-property option agreement between
Mr. Mitchell and the Goldsmiths, and loan documentation between Mr. Mitchell
and Associated Bank. (Mr. Goldsmith admits that these loan documents in
evidence do not require him to make any payments--they are between Mr. Mitchell
and Associated Bank alone.)
      3
        All section references are to the Internal Revenue Code in effect for the
years at issue. All Rule references are to the Tax Court Rules of Practice and
Procedure.
                                       -8-

[*8] Goldsmith, 

(8th Cir. 2007), vacated and remanded, 

(2008).

E.    The Audit

      After Mr. Goldsmith was released, he had to face a civil audit. The

Commissioner also examined G&A for the same years. The result was a notice of

worker reclassification to G&A that determined Mr. Goldsmith was an employee,4

and a notice of deficiency to Mr. Goldsmith.

      In the notice of deficiency that he sent to Mr. Goldsmith, the Commissioner

determined that G&A had had gross receipts of:

                  Year                                 Gross receipts
                  1999                                   $278,537
                  2000                                     984,645
                  2001                                     259,766
                  2002                                     147,242

and--despite Mr. Goldsmith’s lack of good recordkeeping--that G&A was entitled

to deduct:




      4
        Mr. Goldsmith did not address this issue during trial or on brief, and we
deem it conceded. See Rule 34(b)(4), McNeil v. Commissioner, T.C. Memo.
2011-150, 

, at *1 n.3, aff’d, 451 F. App’x 622 (8th Cir. 2012).
                                       -9-

 [*9] Expense         1999             2000           2001             2002
 Business          $268,000         $372,000        $396,000         $270,000
 expenses
 Automobile            2,000             4,470          3,800            1,500
 expenses

As to G&A’s financial status, the parties stipulated some numbers, and although

those numbers are incomplete, we can find that G&A operated at a loss for the

1999, 2001, and 2002 tax years. The year of the windfall contingent fee, 2000,

was the only year G&A made a profit.

      The consequences flowed through to Mr. Goldsmith, and the Commissioner

determined that for his 1999 through 2002 tax years he had:

      Item         1999                2000           2001             2002
 Wages               $81, 760        $91,150         $83,110         $100,960
 Schedule E          (21,695)        516,455        (159,442)           ---
  income/loss
  from G&A
 Standard             (3,600)          (3,675)        (3,800)          (3,925)
  deduction
 Exemptions           (2,750)                         (2,900)          (2,820)
 Non-employee             ---           2,500           ---             ---
  compensation

 Debt                     ---           5,596           ---             ---
  forgiveness
 Capital gain             ---          17,829          7,000             471
                                         - 10 -

 [*10] Self               ---            (34)               ---              ---
  employment
  tax
  deduction
Qualified                 ---             ---               ---             4,874
 retirement
 account
 income

The parties settled many of the issues, and we tried the cases in Minnesota, where

Mr. Goldsmith was and remains a resident.

                                      OPINION

      To properly present an issue for decision, a taxpayer must raise it in his

petition and argue it during trial or in his posttrial brief. See Rule 34(b)(4);

McNeil v. Commissioner, T.C. Memo. 2011-150, 

, at *1 n.3,

aff’d, 451 F. App’x 622 (8th Cir. 2012). We deem the many issues that Mr.

Goldsmith failed to argue during trial or on brief5 as conceded. That leaves us

with only a handful of issues:

 •    Whether the alleged closing costs and the alleged $300,000 payment out of
      the equity in the Goldsmith home to Mitchell are deductible by G&A;



      5
         In his reply brief, Mr. Goldsmith asserts that he didn’t concede any issues,
but that in his rush to prepare for trial there was confusion between the parties. He
still doesn’t argue the issues and instead suggests that they be dismissed in his
favor. We will not do so.
                                        - 11 -

 [*11] •     Whether Mr. Goldsmith is entitled to additional increases in his
             basis in G&A;

 •    Whether he received wages from G&A during the 1999 through 2002 tax
      years;

 •    Whether he had cancellation-of-indebtedness income for the 2000 tax year;

 •    Whether he owes additions to tax for failing to timely file and timely pay
      for 1999, 2000, and 2002.

I.    Closing Costs and Payment to Mitchell

      Mr. Goldsmith argues that the closing costs and the $300,000 he says he

paid Mr. Mitchell for the deal on his home are expenses that G&A may deduct

because the agreement was to G&A’s benefit. This seems at first glance unlikely--

the home was the Goldsmiths’ personal residence. But his argument is that the

payments to Mr. Mitchell were to pay off four separate loans to G&A for a total of

$375,000 from two lenders during the 2000 and 2001 tax years. For each loan,

Mr. Goldsmith and his wife signed an unconditional guaranty backing G&A’s

performance. He and his wife secured their guaranties with yet another mortgage

on their personal property. When G&A defaulted on those loans, it owed the

money to Mr. Goldsmith. He says that by operation of the contracts and

Minnesota state law G&A would have been liable upon default to Mr. Goldsmith

for his loss and the cost of performing his guaranties--a total of about $1.5 million.
                                         - 12 -

[*12] Mr. Goldsmith argues that he had to refinance his residence with Mr.

Mitchell so that he could get the money to give to G&A so G&A could repay him.

      The Commissioner disagrees with this rather convoluted argument and

argues more straightforwardly that even if G&A was on the hook to Mr.

Goldsmith, there can be no business deduction for G&A for expenses that were

personal to Mr. Goldsmith. We agree: The answer here does not rely on the

contracts between Mr. Goldsmith and G&A that Mr. Goldsmith analyzes at length

under Minnesota law, but rather on the nature of the expense.

      A.      Ordinary and Necessary Expenditures of G&A

      Section 162(a) allows a taxpayer to deduct expenses paid or incurred during

the taxable year in carrying on a trade or business. Section 162(a) requires that the

expense be:

      •       paid or incurred during the tax year,

      •       incurred to carry on its trade or business, and

      •       “ordinary” and “necessary” to the business.

See Commissioner v. Lincoln Sav. & Loan Ass’n, 

, 352 (1971);

Dobbe v. Commissioner, T.C. Memo. 2000-330, aff’d, 61 F. App’x 348 (9th Cir.

2003). The key here in deciding whether G&A can deduct Mr. Goldsmith’s

closing costs and the alleged $300,000 payment to Mr. Mitchell is whether that
                                        - 13 -

[*13] cost was its own “ordinary” and “necessary” expense. See sec. 262(a);

Cavanaugh v. Commissioner, T.C. Memo. 2012-324; Dobbe, T.C. Memo. 2000-

330. Even if it is true that Mr. Goldsmith’s refinancing indirectly benefited G&A,

we’ve consistently found that where a taxpayer’s primary reason for an expense is

personal, the expense is not a deductible business expense. See Rehman v.

Commissioner, T.C. Memo. 2013-71; Deihl v. Commissioner, T.C. Memo. 2005-

287; see also Dobbe, T.C. Memo. 2000-330.

      In Rehman, the taxpayer claimed that the primary purpose of a trip to Las

Vegas was for his business, but the evidence showed that the trip was for

gambling and other entertainment. No business-expense deduction there. In

Dobbe the taxpayers argued that landscaping their personal residence benefited

their business (which they ran from their home) by improving its “first

impression” on customers. We found that the landscaping did have some

incidental benefit to the business, but also found that it primarily benefited the

taxpayers personally because it made their home prettier. No business-expense

deduction there either.

       It’s the same here. Mr. Goldsmith’s alleged payments to Mr. Mitchell

were personal. The agreement between Mr. Mitchell and Mr. Goldsmith was just

that--between them and not between Mr. Mitchell and G&A. We also specifically
                                       - 14 -

[*14] find that Mr. Goldsmith was quite desperate to stay in his personal residence

and not lose all the equity that he and his wife had in it. Even if G&A indirectly

benefited from the refinance, we find Mr. Goldsmith’s primary purpose for the

refinancing of his personal residence was personal. We find for the Commissioner

on this issue.

      B.     Substantiation

      As an alternative holding, we find that even if the refinancing primarily

benefited G&A, Mr. Goldsmith did not substantiate the amount of those

expenditures. To prove deductions under section 162, a taxpayer must keep

sufficient records to substantiate them. Sec. 6001; sec. 1.6001-1(a), Income Tax

Regs. We may estimate some types of business expenses, but only if the taxpayer

provides at least some documentation to support an estimate and only if we are

convinced from the record that he incurred them. Cohan v. Commissioner, 

, 543-44 (2d Cir. 1930); Blythe v. Commissioner, T.C. Memo. 1999-11.

Mr. Goldsmith did not present any evidence other than his testimony that he paid

closing costs or $300,000 to Mr. Mitchell in the deal for his residence. See supra

note 2. We do not find his uncorroborated testimony on this issue credible. And

without that, we decline to make a Cohan estimation.
                                        - 15 -

[*15] II.    Mr. Goldsmith’s Basis in G&A

      Sections 1366 through 1368 govern the tax treatment of S corporation

shareholders. Under section 1366, items of an S corporation are generally passed

through to the shareholders and are not subject to tax at the corporate level. Id.;

Gleason v. Commissioner, T.C. Memo. 2006-191. A corporation like G&A that

lost so much money might at least produce deductible losses. But the Code limits

flowthrough losses and deductions to the sum of a shareholder’s adjusted basis in

his stock and the corporation’s indebtedness to him. Sec. 1366(d); Barnes v.

Commissioner, T.C. Memo. 2012-80, aff’d, 

(D.C. Cir. 2013);

Gleason, T.C. Memo. 2006-191.

      A shareholder’s basis in his S corporation is increased by income passed

through to him and decreased by certain distributions, items of loss and deduction,

and nondeductible noncapital expenses. Secs. 1366(a)(1), 1367(a). Section 1368

dictates the tax treatment of distributions: If the S corporation does not have

earnings and profits in a particular year, any distributions are generally not

included in a shareholder’s taxable income. Distributions up to basis are returns

of capital, and distributions in excess of basis are taxed as capital gain. Sec.

1368(b); see Truesdell v. Commissioner, 

, 1294-95 (1987); see also

D’Errico v. Commissioner, T.C. Memo. 2012-149.
                                       - 16 -

[*16] One can see how these rules work if we use 2000, in which G&A collected

the $880,000 contingent fee. G&A had been struggling for quite some time, and

was operating at a deficit that year. When G&A distributed the fee to Mr.

Goldsmith, G&A’s lack of accumulated earnings meant that this amount was not

necessarily included in Mr. Goldsmith’s taxable income. It might well be a return

of capital to the extent of his aggregate basis in G&A’s stock. Untangling Mr.

Goldsmith’s records to calculate his basis in G&A is thus important.

      The Commissioner allowed many of Mr. Goldsmith’s contributions to G&A

to count toward his basis. But Mr. Goldsmith wants more. We will address each

year in dispute separately.

      19976

      For the 1997 tax year the parties stipulated that Mr. Goldsmith made the

following payments, contributions, and advances to G&A that increased his basis:

                                Item                                   Amount
 Capital stock                                                              $100
 Corporate expenses paid by Goldsmith                                    17,328
 Corporate expenses paid by Goldsmith                                       6,112



      6
       The 1997 tax year was not part of the notice of deficiency, but we look at it
because it affects basis computation for the years that were. Sec. 6214(b).
                                       - 17 -

 [*17] Severance payment to Goldsmith contributed to G&A                  73,327
 August 4 advance                                                         30,000
 August 15 advance                                                        15,000
 August 21 advance                                                        20,000
 August 28 advance                                                        12,000
 September 30 advance                                                      4,508
 December 15 advance                                                     13,500
  Total                                                                 191,875

But Mr. Goldsmith says he also made the following additional payments,

contributions and advances:

                              Item                                    Amount
 Corporate expenses paid by Goldsmith                                 $17,523

 Corporate expenses paid by Goldsmith                                    2,197
 Personal advance--8/18/1997                                            15,000
 Personal advance--8/28/1997                                            12,000
  Total                                                                 46,720

Mr. Goldsmith bears the burden of proving that he paid these additional expenses

or made these additional advances, see, e.g., Kaplan v. Commissioner, T.C. Memo.

2005-218; Blodgett v. Commissioner, T.C. Memo. 2003-212, aff’d, 

(8th Cir. 2005), but we find that he has just duplicated what’s already been

stipulated. The claimed additional expenses are very similar to those already
                                      - 18 -

[*18] allowed by the Commissioner, and the claimed additional advances match

two of those already allowed. Mr. Goldsmith claimed during trial that he gave

G&A two identical advances on each August date, but he provided a copy of only

one check for each date. He also offered his testimony, which we do not find

credible without substantiation. Even Mr. Goldsmith himself admits that his

“testimony, alone, makes application of the Cohan rule problematic.” We find Mr.

Goldsmith did not prove an increase in basis during 1997 beyond that already

stipulated.

      2002

      The parties stipulated that Mr. Goldsmith made the following payments,

contributions, and advances to G&A that increased his basis in 2002:

                         Item                                   Amount
 May 2 deposit/advance                                             $400
 August 12 deposit/advance                                       22,009
 Corporate expenses paid by Goldsmith                           269,934
  Total                                                         292,343
                                         - 19 -

[*19] Mr. Goldsmith claims he paid an additional $297,710 in corporate expenses.

As was the case for 1997, Mr. Goldsmith did not substantiate this claim, and we

find he is not entitled to this additional amount.7

III.   Attributed Wages

       The Commissioner asserts that because Mr. Goldsmith was an employee of

G&A (a fact Mr. Goldsmith conceded during trial) payments made from G&A to

him during the years at issue are constructive wages, which would make G&A

owe more in payroll tax and Mr. Goldsmith owe more in income tax. Mr.

Goldsmith argues that because during those years G&A made no money, it could

not have afforded to pay him wages, and any money he took out of G&A was to

reimburse him for G&A expenses he himself had paid earlier.

       We are very skeptical of the Commissioner’s work on this issue. The

employee-tax agent assigned to Mr. Goldsmith’s case used statistics from the

Minnesota Bureau of Labor to find the average salary of attorneys working in the

Twin Cities for the years at issue. She then looked at G&A’s records and

determined that because Mr. Goldsmith was billing time, and G&A was paying

him, G&A must have been paying him wages. The first problem here is that the

       7
        Mr. Goldsmith also asserts that the payments to Mr. Mitchell in 2002
should increase his basis in G&A. We find that Mr. Goldsmith cannot use
payments he can’t substantiate to increase his basis in G&A.
                                       - 20 -

[*20] agent did not take into account any loans Mr. Goldsmith made to G&A. We

also saw no indication that she considered G&A’s operating expenses or whether

she even asked herself if she had all the information necessary to make her

determination. She admitted that “with [her] experience now, [she] would have

taken [expenses and loans] into much more consideration,” and that since then

she’s learned a lot more.

      There’s no rule that an S corporation has to pay its sole shareholder a wage,

especially when it’s bleeding money the way G&A did. The real question is one

of fact--were the payments a return of capital, repayments of loans, or wages? See

Scott Singer Installations, Inc., v. Commissioner, T.C. Memo. 2016-161. We look

at all the evidence. See Dixie Dairies Corp. v. Commissioner, 

, 493

(1980). Mr. Goldsmith bears the burden of proving that funds paid to him by

G&A were for repayment of loans. See Rule 142(a).
                                         - 21 -

[*21] There’s a multiprong test for this,8 but we stick to the prongs most likely to

implicate the facts we have. To guide us, we have the benefit of Scott Singer

Installations, which featured some freakishly similar facts. As did Mr. Goldsmith,

Mr. Singer raised money for his business from the equity in his home. When he

ran out of equity and was unable to continue borrowing from commercial banks,

he began borrowing from family members and lending it to his corporation. Mr.

Singer may have wanted this to create a debtor-creditor relationship with his

corporation, but we held that these infusions of capital would be loans only if Mr.

Singer reasonably expected to be repaid. For the years the business was strong,

we found Mr. Singer had a reasonable expectation of repayment. But, when

business dropped off, and Mr. Singer was forced to seek help from nontraditional

lenders, he had no reasonable expectation of repayment.


      8
         The factors this court considers in such an analysis include: (1) the names
given to the documents that would be evidence of the purported loans; (2) the
presence or absence of a fixed maturity date; (3) the likely source of repayment;
(4) the right to enforce payments; (5) participation in management as a result of
the advances; (6) subordination of the purported loans to the loans of the
corporation’s creditors; (7) the intent of the parties; (8) identity of interest between
creditor and stockholder; (9) the ability of the corporation to obtain financing from
outside sources; (10) thinness of capital structure in relation to debt; (11) use to
which the funds were put; (12) the failure of the corporation to repay; and (13) the
risk involved in making the transfers. Calumet Indus., Inc. & Subs. v.
Commissioner, 

, 285 (1990); Dunnegan v. Commissioner, T.C. Memo.
2002-119.
                                         - 22 -

[*22] It’s the same here. Mr. Goldsmith sought funding for G&A from usurers

because reasonable creditors would not finance the firm. Even during the earlier

years when he was able to use equity in his home to fund G&A, the business was

running at a deficit. From 1997 through 2002 G&A had only one profitable

year--2000, the year of the large contingent fee. Even with that fee, however,

G&A was still failing--as shown by the losses in the following years and Mr.

Goldsmith’s own acknowledgment. For these reasons we find that payments that

G&A made to Mr. Goldsmith were not wages, as the Commissioner asserts, and

were not reimbursements for expenses as Mr. Goldsmith insists, but rather were a

nontaxable return of capital to the extent of his basis.

IV.   Cancellation-of-Indebtedness Income

      The Commissioner asserts, based on a third-party information return, that

Mr. Goldsmith had $5,596 in cancellation-of indebtedness-income for the 2000

tax year. This is presumptively income, see sec. 61(a)(12), and Mr. Goldsmith

bears the burden of showing that his discharge from indebtedness falls within

some exception to this general rule, see Rule 142(a). One way to do that is to

show that the debt was disputed. McCormick v. Commissioner, T.C. Memo.

2009-239; see Melvin v. Commissioner, T.C. Memo. 2009-199. Mr. Goldsmith

did claim at trial that his discharge was the result of a dispute he settled with a
                                          - 23 -

[*23] credit-card company (whose identity he was not quite sure of), but he was

unable to produce any documentation to prove that--despite his insistence during

trial that he’d received letters describing the dispute. We did not find his

uncorroborated testimony credible, and thus we find for the Commissioner on this

issue.

V.       Additions to Tax

         The Commissioner determined additions to tax under section 6651(a)(1) and

(2) for the 1999, 2000, and 2002 tax years.

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

return. Mr. Goldsmith didn’t file any tax returns for the 1999-2002 tax years, and

he’s offered no evidence9 that the failure to timely file was due to reasonable cause

and not willful neglect. We therefore find for the Commissioner on this issue.

         Section 6651(a)(2) imposes an addition to tax for failing to timely pay tax

shown on a return. No one disputed that the Commissioner prepared adequate

substitutes for returns under section 6020(b)(2). This triggered section 6651(a)(2).

         9
         Mr. Goldsmith did testify that he was clinically depressed during the years
at issue, but was able to otherwise function and represent between 15-30 clients
per month. Even if he had argued his mental illness gave him reasonable cause, a
taxpayer must show that his mental or emotional disorder “rendered [him]
incapable of exercising ordinary business care and prudence during the period in
which the failure to file continued.” Wilkinson v. Commissioner, T.C. Memo.
1997-410, 

, at *7. Mr. Goldsmith couldn’t do this.
                                       - 24 -

[*24] See sec. 6651(g). Mr. Goldsmith has likewise not offered any evidence that

his failure to timely pay his tax was due to reasonable cause, and so we sustain the

addition to tax under section 6651(a)(2).


                                                      Decisions will be entered under

                                                Rule 155.