Proof a Loan is a Loan

One interesting issue that often arises in IRS audits is whether what a taxpayer classifies as a loan is actually a loan.
The Tax Court recently released an interesting, taxpayer friendly, decision on this matter in Stanley v. Commission, TC Memo 2016-196.


The general rule being:


Courts consider various factors in determining whether the parties intended
a bona fide loan, such as: (1) the ability of the borrower to repay; (2) the existence
or nonexistence of a debt instrument; (3) security, interest, a fixed repayment date,
and a repayment schedule; (4) how the parties’ records and conduct reflect the
transaction; (5) whether the borrower had made repayments; (6) whether the
lender had demanded repayment; (7) the likelihood that the loan was disguised
compensation for services; and (8) the testimony of the purported borrower and
lender. Welch v. Commissioner, 204 F.3d 1228, 1230 (9th Cir. 2000), aff’g T.C.
Memo. 1998-121; Frierdich v. Commissioner, 925 F.2d 180, 182 (7th Cir. 1991),
aff’g T.C. Memo. 1989-393; see also Todd v. Commissioner, T.C. Memo. 2011-
123, aff’d, 486 F. App’x 423 (5th Cir. 2012). The factors are “non-exclusive” and
provide a “general basis upon which courts may analyze a transaction”. Welch v.
Commissioner, 204 F.3d at 1230.


In Stanley, the taxpayer did not even have a plan of repayment, but his testimony that he believed the loan offered a good rate of return, and that he did intend to repay the loan helped meet the above tests. The taxpayer was also able to supply general promissory notes.


When working with loans, its always important that taxpayers document any agreements. I've seen these agreements even documented on a napkin over a dinner deal for a loan.


Relevant Citations: TC Memo 2016-196

Ability to Go to Tax Court - Suspended Corporation Status

In Urgent Care Nurses Registry, Inc. v. Commissioner, the Tax Court found that Urgent Care Nurses Registry, Inc. did not have jurisdiction to go to Tax Court because their charter was suspended under California law. This is due to the corporation not having legal capacity to prosecute the case.


This is a pretty common occurrence in the tax world and one that practitioners need to be aware of when representing a business entity. Before taking anything to Tax Court, all state obligations to make sure the company is in good standing with the state should be made.


Relevant Citation: TC Memo 2016-198

Statute of Limitations - Tax Court Docketed Cases

IRS released Chief Counsel Advice 201644020. The most interesting takeaway is that it is the IRS' belief that that statute of limitations on assessment will be suspended when a case is placed on the Tax Court docket for a deficiency hearing, even is there is no deficiency notice that has been issued.


Interesting piece of tax procedure in that the statutory notice of deficiency is not key for suspending the assessment statute.


Relevant Citations: Chief Counsel Advice 201644020