No, I’m not veering into medicine today. The title of this post is a homage to the title of a chapter in a book by the late Fred Karpin. Mr. Karpin was writing about doing everything right, but still having your contract fail in bridge. Today, we’ll look at how the IRS won all the arguments in Tax Court but lost the case.
George Starke played in the NFL back in the 1970s and 1980s, and helped lead the Washington Redskins to three Super Bowl victories. After retiring from the NFL Mr. Starke began the Excel Institute; the Washington (DC) area nonprofit provided basic education skills and job counseling and technical training. While Mr. Starke founded the institute, eventually Jack Lyon became the chairman. Mr. Starke and Mr. Lyon came to disagreements, and Mr. Starke left Excel in 2010. Excel sent Mr. Starke a Form 1099-MISC alleging $83,698.45 of income. Mr. Starke didn’t include that on his 2010 tax return and this dispute found its way to Tax Court.
Mr. Starke either received advances or loans of $83,698.45; the IRS argued they were advances and not loans and thus income. Advances are income in the year received.
We agree that the payments are not loans because we find no evidence that Mr. Starke intended to repay them at the time the payments were made. Although Mr. Starke incurred payroll deductions by Excel, he testified that he did not know why the amounts were being deducted. Further, there is no evidence of loan documents or any other document signed by Mr. Starke and a member of Excel memorializing a loan agreement. Even the 2005 letter from Excel’s accountants that set forth a repayment plan makes clear that Excel and its accountants did not consider the payments to be loans, instead characterizing them as advances.
So the IRS wins, right? Not so fast:
Because we agree that the payments were not loans, we would ordinarily look to whether the payments are considered advances; however, whether the payments are advances is irrelevant in this case because all of the items recorded by Excel as advances or prepaid expenses were recorded for years that are not before the Court. According to Excel’s general ledgers, all of the payments were made before 2010. Because advances are taxable for the year in which they are paid, any advance would have been taxable for years that are not before us.
The advances all occurred prior to 2010, so the income was earned in the past–not 2010, not the year in question. Each tax year stands on its own. So Mr. Starke wins, and while the IRS won the arguments they lost the battle.
Case: Starke v. Commissioner, T.C. Summary 2015-40
Tags: George.Starke