Payments Were Compensation, Not Loans; Penalties Imposed

John R. Bampfield, for respondent.

[*2]

                                            Additions to tax

After concessions the issues for consideration are whether amounts paid to petitioner by the Richard W. Quisling, M.D., P.C. (Quisling), in tax years 2003 through 2010 are includible in gross income and whether petitioner is liable for additions to tax pursuant to sections 6651(a)(1) and (2) and 6654.

Petitioner did not file income tax returns for tax years 2002 through 2010. Pursuant to section 6020(b) respondent prepared and signed substitutes for returns for tax years 2002 through 2010.

Richard W. Quisling is the sole shareholder of Quisling through which Dr. Quisling operated a medical practice. Quisling paid petitioner the following amounts for the tax years in issue:

           Year                          Payment

Beginning in 2003 petitioner received payments from Quisling. The payments were in the form of checks, and the date of the first check was March 15, 2003. From March 2003 through December 2010 Quisling made monthly payments to petitioner.

Petitioner sent Dr. Quisling a memorandum entitled "Memorandum of Understanding on Loan Terms and Conditions". This memorandum states:

[*5] This memorandum, dated April 1, 2003, includes the signature of petitioner but not the signature of Dr. Quisling. Petitioner sent Dr. Quisling a followup letter to the memorandum requesting a memorandum of acceptance. The memorandum of acceptance includes a signature alleged to be Dr. Quisling's, but this signature is not his.

Petitioner did not make payments to Dr. Quisling. Neither Dr. Quisling nor Mrs. Quisling demanded payment from petitioner.

On February 5, 2011, petitioner faxed Dr. Quisling a letter referencing an alleged purchase of medical equipment that Quisling made from petitioner's deceased husband. On February 25, 2011, Dr. Quisling's attorney and the attorney for Quisling, Vincent Zuccaro, sent petitioner a letter stating that Quisling had not purchased any equipment from her husband or received a gift of property from her or her husband. That same day Dr. Quisling also sent petitioner a letter stating that he would no longer see her as a patient. Petitioner faxed an additional letter to Dr. Quisling on February 28, 2011. Mr. Zuccaro sent petitioner a letter in response and reiterated that petitioner should not contact Dr. Quisling and Mrs. Quisling.

[*6] Petitioner faxed letters to Mr. Zuccaro on February 28, March 1, 2, 10, 14, and 25, and April 11, 2011. In these letters, petitioner appeared to be trying to reach some type of settlement with Quisling.

Petitioner for the years at issue made estimated income tax payments or had tax withheld in the following amounts:

           Year                          Amount

Respondent's determinations in the notices of deficiency are based in substantive evidence linking petitioner with the income at issue. Included among the stipulated exhibits were 2004 and 2005 canceled checks of payments to petitioner. We are satisfied that respondent has carried his burden with respect to the unreported additional income.

Courts consider various factors to determine whether parties intended a bona fide loan; no single factor is dispositive. See 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; Kaider v. Commissioner, T.C. Memo. 2011-174, slip op. at 15-16. We examine the following factors to determine whether payments to petitioner were loans:

A. The Ability of the Borrower To Repay

If the parties did not intend that the funds be repaid after they were advanced, it suggests that the parties did not intend a bona fide loan. See Commissioner v. Makransky, 321 F.2d 598, 600 (3d Cir. 1963), aff'g 36 T.C. 446 (1961). Courts assess the ability to repay by whether there was "a reasonable expectation of repayment in light of the economic realities of the situation." Fisher v. Commissioner, 54 T.C. at 910.

Petitioner contends that payments made by Quisling were loans. Petitioner testified that she needed the money to fund the research for a book that she was writing. However, petitioner produced no evidence of the book including the potential for publishing the book or any other evidence of her ability to repay. Dr. Quisling testified that the payments were not loans and that he did not expect to be repaid.

[*10] B. The Existence or Nonexistence of a Debt Instrument

There is a memorandum dated April 1, 2003, entitled "Memorandum of Understanding on Loan Terms and Conditions" which discusses terms of the alleged loans. This memorandum is signed by petitioner. There is a memorandum entitled "Memorandum of Acceptance" which is not dated and which includes a signature for Dr. Quisling. Both Dr. Quisling and Mrs. Quisling testified that the signature on the "Memorandum of Acceptance" is not his signature. Dr. Quisling testified that he had never seen the document before respondent's counsel showed it to him.

C. Security, Interest, a Fixed Repayment Date, and a Repayment Schedule

D. How the Parties' Records and Conduct Reflect the Transaction

Petitioner testified that the payments were loans for a book, but there was no evidence to support this contention. Petitioner's records of loans were not credible. Petitioner did not submit a loan agreement signed by Dr. Quisling. Dr. Quisling and Mrs. Quisling were credible witnesses. They contended the payments were for services petitioner performed related to patient billing and other financial aspects of medical practice. Quisling did not issue petitioner Forms 1099-MISC. However, Quisling had no documentation to support loans to petitioner.

E. Whether the Borrower Has Made Repayment

If the borrower has made repayment, it suggests that the parties intended a bona fide loan. Welch v. Commissioner, 204 F.3d at 1231. Petitioner had not made any payments.

F. Whether the Lender Has Demanded Repayment

A demand for repayment suggests that the parties intend a bona fide loan.

See Estate of Rosen v. Commissioner, T.C. Memo. 2006-115. Quisling has not demanded repayment.

[*12] G. The Likelihood That the Loans Were Disguised Compensation for Services

Petitioner contends that the payments were loans to finance the cost of research for her book. Dr. Quisling and Mrs. Quisling provided credible testimony that the payments were made for services. The memorandum describing the alleged loans discusses the development of a microeconomic and macroeconomic model that will impact the short-range and long-range delivery of medical services.

Dr. Quisling and Mrs. Quisling testified that petitioner assisted with a Blue Cross Blue Shield audit, billing issues, and lease agreements. Dr. Quisling testified that petitioner was "discharged" in February 2011 because she asked for documentation to buy equipment from her and she refused to provide information such as her full name and Social Security number. Petitioner contends that she must be "magical" if she was able to perform the services described by Dr. Quisling and Mrs. Quisling.

H. Testimony of the Purported Borrower and Lender

Petitioner testified the payments were loans, but she had no credible supporting documentation. Petitioner testified that she sent Dr. Quisling a letter dated April 1, 2003, providing guidance for the audit with Blue Cross Blue Shield.

[*13] Petitioner testified that the Internal Revenue Service audited Quisling's returns in 2010 and not until then was there a request for her to fill out a Form W-9, Request for Taxpayer Identification Number and Certification.

Dr. Quisling and Mrs. Quisling testified the payments were for services, and they provided credible testimony. Dr. Quisling testified that petitioner was paid $10,000 in 2003 to assist with Blue Cross Blue Shield of Tennessee. He further testified that after the successful outcome of the audit, petitioner resolved other insurance disputes, assisted with credentialing committees, produced ideas for advertising and business development, negotiated a dispute with Summit Hospital, resolved a dispute with a new landlord, and confronted Humana Insurance in Lexington, Kentucky. Mrs. Quisling testified that petitioner was paid $3,000 a month for her services and the payments increased to $4,000 a month. Dr. Quisling testified that he asked petitioner to provide her Social Security number in late 2010 and she refused. Dr. Quisling stopped paying petitioner in December of 2010. On February 18, 2011, Dr. Quisling terminated petitioner as a patient.

Dr. Quisling and Mrs. Quisling testified that Quisling did not purchase any equipment from petitioner's deceased husband and that petitioner requested information about the alleged purchases in February of 2011.

[*14] Petitioner testified that she received loans from Dr. Quisling to write a book. Her testimony was inconsistent and she submitted a letter referencing that Dr. Quisling purchased equipment from her deceased husband.

Section 6651(a)(1) authorizes the imposition of an addition to tax for failure to file a timely return unless the taxpayer proves that such failure is due to reasonable cause and is not due to willful neglect. See United States v. Boyle, 469 U.S. 241, 245 (1985); Harris v. Commissioner, T.C. Memo. 1998-332. The parties stipulated that petitioner did not file income tax returns for tax years 2002 through 2010. This stipulation is sufficient to satisfy respondent's burden of production under section 7491(c). Petitioner did not show reasonable cause for her failure to [*15] file tax returns. Therefore, petitioner is liable for the addition to tax under section 6651(a) for each of those years.

B. Section 6651(a)(2)

Section 6651(a)(2) imposes an addition to tax for failure to timely pay the amount shown on a return. In a case such as this where the taxpayer did not timely file returns for the tax years at issue, the Commissioner must introduce evidence that a valid substitute for return was made pursuant to section 6020(b). Sec. 6651(g)(2). The parties stipulated that substitutes for returns were prepared in accordance with section 6020(b). Petitioner did not show reasonable cause for her failure to file tax returns.

We hold that petitioner is liable for the addition to tax under 6651(a)(2) for each of tax years 2002 through 2010.

C. Section 6654

Section 6654 imposes an addition to tax on an individual taxpayer who underpays his or her estimated tax. A taxpayer has an obligation to pay estimated tax for a particular year if he or she has a "required annual payment" for that year. Sec. 6654(d). Because petitioner failed to file a return for each year in issue from 2003 through 2010, she was required to pay estimated tax equal to 90% of the tax owed for each of those years. See sec. 6654(d)(1)(B). Petitioner failed to make [*16] those payments, and no exception to the addition to tax under section 6654 applies. See Grosshandler v. Commissioner, 75 T.C. 1, 20-21 (1980).

We hold petitioner is liable for the addition to tax under section 6654 for each of tax years 2003 through 2010. Any contentions we have not addressed are irrelevant, moot, or meritless. To reflect the foregoing,

Decision will be entered under Rule 155.