# Ackerman v. Comm'r > United States Tax Court · April 15, 2009 · 97 T.C.M. 1392 URL: https://www.frixlaw.com/law-library/cases/4337541 ## Case - **Full name:** PETER ACKERMAN AND JOANNE LEEDOM-ACKERMAN v. COMMISSIONER OF INTERNAL REVENUE - **Court:** United States Tax Court - **Decided:** April 15, 2009 - **Citations:** 97 T.C.M. 1392; 2009 T.C. Memo. 80; 2009 Tax Ct. Memo LEXIS 81 - **Precedential status:** Unpublished - **Opinion:** Opinion - **Judges:** Chiechi - **Cited by:** 2 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4337541 ## How later opinions describe it (automated extraction) - finding no trade or business as "promoter" where taxpayer did not receive fees or commissions for providing advisory services ## Opinion text T.C. Memo. 2009-80 UNITED STATES TAX COURT PETER ACKERMAN AND JOANNE LEEDOM-ACKERMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 13947-06, 26400-06. Filed April 15, 2009. George W. Connelly, Jr., Linda S. Paine, and Pamela E. Powers, for petitioners. Christopher A. Fisher and Richard S. Bloom, for respondent. Table of Contents FINDINGS OF FACT . . . . . . . . . . . . . . . . . . . . . . 4 Background . . . . . . . . . . . . . . . . . . . . . . . . . 5 Peter Ackerman . . . . . . . . . . . . . . . . . . . . . 5 Perry Lerner . . . . . . . . . . . . . . . . . . . . . . 7 Don Ackerman . . . . . . . . . . . . . . . . . . . . . . 8 Jason Ackerman . . . . . . . . . . . . . . . . . . . . . 8 Jeffrey Deutschman . . . . . . . . . . . . . . . . . . . 9 - 2 - Somerville S Trust and Certain Other Entities That It Owned . . . . . . . . . . 9 Deena Patriarca . . . . . . . . . . . . . . . . . . . 11 Rockport Advisors . . . . . . . . . . . . . . . . . . 11 Crown Capital . . . . . . . . . . . . . . . . . . . . 13 Petitioners’ Tax Returns . . . . . . . . . . . . . . . 15 Notices of Deficiency . . . . . . . . . . . . . . . . 16 Claimed Business Expense Deductions . . . . . . . . . . . . 16 Claimed Deduction for the Protection of Business Reputation . . . . . . . . . . . 32 Funds Advanced to ECC . . . . . . . . . . . . . . . . 33 Book and Tax Treatment of the $7,850,000 of Advanced Funds by Somerville and by Santa Monica . 37 Claimed Losses With Respect to ISI . . . . . . . . . . . . 40 Claimed Theft Loss Deduction . . . . . . . . . . . . . . . 42 Accuracy-Related Penalty Under Section 6662(a) . . . . . . 49 OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Burden of Proof . . . . . . . . . . . . . . . . . . . . . . . 54 Evaluation of Evidence on Which Petitioners Rely . . . . . 56 Testimonial Evidence . . . . . . . . . . . . . . . . . 56 Mr. Ackerman’s Testimony . . . . . . . . . . . . 57 Mr. Lerner’s Testimony . . . . . . . . . . . . . 57 Don Ackerman’s Testimony . . . . . . . . . . . . 57 Jason Ackerman’s Testimony . . . . . . . . . . . 58 Mr. Deutschman’s Testimony . . . . . . . . . . . 58 Ms. Patriarca’s Testimony . . . . . . . . . . . . 58 Mr. Braddock’s Testimony . . . . . . . . . . . . 59 Mr. Levinton’s Testimony . . . . . . . . . . . . 59 Documentary Evidence . . . . . . . . . . . . . . . . . 59 Claimed Business Expense Deductions . . . . . . . . . . . . 60 Petitioners’ Cost Company or Agency Argument . . . . . 61 Petitioners’ Compensation Argument . . . . . . . . . . 71 Claimed Deduction for the Protection of Business Reputation . . . . . . . . . . . 88 Claimed Losses With Respect to ISI . . . . . . . . . . . . 96 Claimed Theft Loss Deduction . . . . . . . . . . . . . . . 104 - 3 - Accuracy-Related Penalty Under Section 6662(a) . . . . . . 108 APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . 117 APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . 119 MEMORANDUM FINDINGS OF FACT AND OPINION CHIECHI, Judge: Respondent determined the following defi- ciencies in, an addition under section 6651(a)(1)1 to, and accuracy-related penalties under section 6662(a) on petitioners’ Federal income tax (tax): Addition to Tax Accuracy-Related Penalty Year Deficiency Under Sec. 6651(a)(1) Under Sec. 6662(a) 1997 $1,022,612 -- -- 1998 163,350 -- -- 2000 657,877 -- -- 2002 771,330 $20,959.40 $154,266.00 2004 206,239 -- 41,247.80 The issues remaining for decision are:2 (1) Are petitioners entitled for each of their taxable years 1997, 1998, 2000, 2002, and 2004 to deduct certain claimed business expenses under section 162(a)? We hold that they are not. 1 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. 2 Issues (2), (3), and (4) set forth below are affirmative issues that petitioners raised in the pleadings and that do not relate to any determinations in the notices of deficiency. - 4 - (2) Are petitioners entitled for their taxable year 1997 to deduct under section 162(a) certain funds that they claim peti- tioner Peter Ackerman advanced to a certain corporation in order to protect his business reputation? We hold that they are not. (3) Is a certain loss with respect to a company in which petitioner Peter Ackerman indirectly owned an interest a passive activity loss within the meaning of section 469(a) for each of petitioners’ taxable years 1998 and 2000? We hold that it is. (4) Are petitioners entitled for their taxable year 2002 to deduct a claimed theft loss under section 165(a)? We hold that they are not. (5) Are petitioners liable for each of their taxable years 2002 and 2004 for the accuracy-related penalty under section 6662(a)? We hold that they are. FINDINGS OF FACT3 Some of the facts have been stipulated and are so found except as stated below. Petitioners resided in Washington, D.C., at the time they filed the petition in each of these cases. 3 We found the record in these cases to have been not well developed, inconclusive, and/or not reliable in many respects, including certain material respects. Although the gaps in the record are substantial in many instances, and therefore our findings of fact are incomplete and/or disconnected in those instances, we have not undertaken to note every instance in which the record does not contain reliable evidence that would have enabled us to find all the facts relevant to our deciding the issues presented. - 5 - Background Peter Ackerman Petitioner Peter Ackerman (Mr. Ackerman) received a bache- lor’s degree from Colgate University and a master’s degree in law and diplomacy and a Ph.D. degree from the Fletcher School of Law and Diplomacy of Tufts University (Fletcher School). From the mid-1970s until January 1990, Drexel Burnham Lambert (Drexel) employed Mr. Ackerman in various positions.4 The first position that Mr. Ackerman held at Drexel was assistant to the president. From 1978 to 1989, Mr. Ackerman was in charge of Drexel’s so-called special projects group. As head of that group, Mr. Ackerman worked on, inter alia, the restructuring and the financing of various businesses. Drexel received various types of fees, equity interests, and investment opportunities in connection with its special projects work. In early 1990, Mr. Ackerman moved to London, England (Lon- don), where he became a visiting scholar at the International Institute for Strategic Studies, a premier think tank that concentrated on issues relating to international security. While living in London, Mr. Ackerman registered with English authorities as a person undertaking a business and formed, owned 4 While at Drexel, Mr. Ackerman worked on, inter alia, the restructuring of Penn Central Railroad and Resorts International and the formation and the financing of a company for the purpose of taking over a certain other company that operated supermar- kets. - 6 - with petitioner Joanne Leedom-Ackerman (Ms. Ackerman), and served as the director of a company known as Rockport Capital Limited. The principal activity of that company was providing certain consulting services. From 1990 to 1992, Ms. Ackerman owned a company known as Rockport Consultants, Inc. (Rockport Consultants), that was incorporated as a Delaware corporation on September 5, 1990, and that filed an election to be taxed as an S corporation on or about January 1, 1991. Rockport Consultants was engaged in the business of providing certain consulting services. While resid- ing in London, Mr. Ackerman served as the director of Rockport Consultants and acted on behalf of that company in providing certain consulting services. The consulting services that Rockport Consultants provided included certain consulting ser- vices provided to Saatchi & Saatchi Company Plc. (Saatchi & Saatchi) with respect to, inter alia, its financing and its capital structure. In exchange for those services, Rockport Consultants received from Saatchi & Saatchi fees of more than $5 million. On or about January 3, 1992, Rockport Consultants changed its name to Rockport Financial, Inc. (Rockport Financial). - 7 - During each of Rockport Financial’s taxable years 1992, 1993, and 1994, Ms. Ackerman was its sole stockholder.5 At the end of 1995, Mr. Ackerman left London and returned to the United States. Thereafter, as discussed in more detail below, Mr. Ackerman became interested in and explored various investment opportunities. During each of the years 1997, 1998, 2000, 2002, and 2004, the years at issue, Mr. Ackerman devoted 40 to 50 percent of his time to social and charitable causes. For example, Mr. Ackerman served on the respective boards of CARE and Freedom House and as chairman of the Fletcher School. Perry Lerner While Mr. Ackerman was living in London, he met Perry Lerner (Mr. Lerner). Mr. Lerner received a bachelor’s degree from Claremont McKenna College and a law degree from Harvard Univer- sity. From approximately 1980 to 1996, Mr. Lerner practiced law as a tax attorney with the law firm of O’Melveny & Myers, LLP (O’Melveny & Myers). In that capacity, Mr. Lerner represented Mr. Ackerman with respect to various legal matters. Around 1996, Mr. Lerner resigned from O’Melveny & Myers in order to provide certain legal services for Mr. Ackerman on a full-time basis. 5 As discussed below, on or about Apr. 15, 1996, Rockport Financial changed its name to Rockport Capital, Inc. (Rockport Capital). - 8 - In February 1996, Mr. Lerner formed Rockport Advisors, Inc. (Rockport Advisors). In January 1997, he formed Crown Capital Group, Inc. (Crown Capital). As discussed in more detail below, Mr. Lerner used Rockport Advisors and Crown Capital in order to provide certain services with respect to certain investment opportunities that Mr. Ackerman wanted to explore and/or pursue. Don Ackerman Don Ackerman is the older brother of Mr. Ackerman. From around 1965 to around the end of 1997, Don Ackerman managed the business operations of Economy Color Card, Inc. (ECC), a supplier of wallpaper sample books and sample cards for paint, rugs, and wood pieces. Jason Ackerman Jason Ackerman is the son of Don Ackerman and the nephew of Mr. Ackerman. Jason Ackerman received an undergraduate degree in economics and business management from Boston University. Beginning around 1990, Jason Ackerman worked as an investment banker (1) for about a year at Drexel and (2) for about seven years at Donaldson Lufkin Jenrette. While serving as an invest- ment banker, Jason Ackerman worked on several business deals that involved the formation of companies for the purpose of taking over certain other companies that operated supermarkets. - 9 - Jeffrey Deutschman Jeffrey Deutschman (Mr. Deutschman) received a bachelor’s degree in history and economics from Columbia University and a master’s degree in business administration from the Graduate School of Management of the University of California, Los An- geles. From 1981 through 1997, Mr. Deutschman worked for or was a partner in various private equity firms. Mr. Deutschman first met Mr. Ackerman in 1981 while Mr. Ackerman was working for Drexel. At that time, Mr. Deutschman had been working for a private equity firm for which Drexel had been interested in financing an acquisition. Somerville S Trust and Certain Other Entities That It Owned During each of the years at issue, Mr. Ackerman was treated as the owner of Somerville S Trust, a so-called grantor trust under section 671. For all relevant taxable years of petition- ers, all of the income, deductions, and credits of Somerville S Trust were includible in the computation of their taxable income and credits. During each of the years at issue, Mr. Lerner was the trustee of Somerville S Trust and was fully empowered to transfer or invest its assets. On or about April 15, 1996, Rockport Financial changed its name to Rockport Capital. During each of the years at issue, - 10 - Somerville S Trust was the sole stockholder of Rockport Capital.6 Pursuant to a limited liability company agreement dated December 10, 1996, Rockport Capital and Mr. Lerner formed Santa Monica Pictures, LLC (Santa Monica). Since its formation, Santa Monica has been subject to the unified partnership provisions of sections 6221 through 6234. On December 11, 1996, Somerville S Trust became a member of, and received a 99.882-percent profits interest in, Santa Monica. During 1997 and thereafter, the members of Santa Monica were Somerville S Trust, Rockport Capi- tal, and Mr. Lerner. Pursuant to a limited liability company agreement dated December 15, 1997, Somerville S Trust formed Somerville, LLC (Somerville). From its formation until December 29, 1997, Somerville S Trust was the sole member of Somerville. On Decem- ber 29, 1997, Somerville S Trust contributed its interest in Somerville to Santa Monica, and Santa Monica became, and has remained, the sole member of Somerville.7 6 The record does not disclose when or how Somerville S Trust acquired its interest in Rockport Capital. 7 Somerville was a “disregarded” entity under secs. 301.7701- 2(a) and 301.7701-3(a) and (b)(1)(ii), Proced. & Admin. Regs., and was not required to file a tax return for any of the years at issue. Nonetheless, as discussed in more detail below, it prepared Form 1065, U.S. Return of Partnership Income (Form 1065), for each of those years. - 11 - Deena Patriarca From 1984 until February 1990, Drexel employed Deena Patriarca (Ms. Patriarca) as an assistant to Mr. Ackerman. Shortly thereafter, Rockport Capital or one of its predecessors employed her.8 During each of the years at issue, Ms. Patriarca handled (1) the bookkeeping, accounting, payroll, and similar functions for Rockport Capital and (2) the bookkeeping for Somerville S Trust. Rockport Advisors As discussed above, in February 1996, Mr. Lerner formed Rockport Advisors, which was located in Washington, D.C.9 During 8 For several months after Ms. Patriarca left Drexel, she provided certain unidentified services for Mr. Ackerman in his personal capacity. 9 The record is very sparse as to the activities of Rockport Advisors during each of the years at issue. The record, however, does establish that (1) as of Aug. 25, 1995, Somerville S Trust was a member of, and had agreed to make capital contributions totaling $100 million to, Cumberland Investment Partners, LLC (Cumberland Investment), (2) the purpose of Cumberland Investment was to invest in securities and other similar investments, and (3) on Mar. 1, 1996, Rockport Advisors agreed to provide certain unidentified administrative services to Cumberland Investment. The record also establishes that on Mar. 1, 1996, Rockport Advisors and two individuals entered into an employment agreement (Rockport Advisors employment agreement) under which Rockport Advisors was to, and did, employ those two individuals (two Rockport Advisors employees). That agreement provided that Somerville S Trust was to “bear the costs of the services per- formed by * * * [the two Rockport Advisors employees] on behalf of Rockport Advisors.” The Rockport Advisors employment agree- ment further provided the following mechanism by which Somerville S Trust was to recoup those costs: (continued...) - 12 - each of the years at issue, Mr. Lerner was the sole owner of Rockport Advisors. At all relevant times, Rockport Advisors maintained books and records, had employees, and generated income. Rockport Advisors filed Form 1120, U.S. Corporation Income Tax Return (Form 1120), for each of its taxable years 1997, 1998, and 2000.10 In each of those returns, Rockport Advisors showed its business activity as “ADVISORY SERVICES” and its product or service as “CONSULTING”. In Form 1120 for its taxable year 1997, Rockport Advisors reported total income of $1,600,196, total deductions of $1,909,634, and a loss of $309,438. In Form 1120 for its taxable year 1998, Rockport Advisors reported total income of $951,395, total deductions of $1,144,857, and a loss of $193,462. In Form 9 (...continued) To allow Somerville [S Trust] to recoup these costs, * * * [the two Rockport Advisors employees were to] cause to be paid to Somerville [S Trust] 25% of any performance-based fees * * * [they] receive in the future while * * * employed by Rockport Advisors from clients other than Cumberland [Investment], until Somerville [S Trust] has received an amount equal to the unrecovered balance in its “Recoupment Account.” * * * The record further establishes that in 2000 and 2001 the two Rockport Advisors employees caused $60,000 and $100,031.73, respectively, to be paid to Rockport Advisors in order for Somerville S Trust to recoup the costs that it had incurred with respect to the services performed by them. 10 The record does not disclose whether Rockport Advisors filed Form 1120 for any of the other taxable years at issue. - 13 - 1120 for its taxable year 2000, Rockport Advisors reported total income of $1,296,676, total deductions of $1,239,039, and taxable income of $57,637. Crown Capital As discussed above, in January 1997, Mr. Lerner formed Crown Capital, which was located in New York City. On or about January 1, 1998, Crown Capital filed an election to be taxed as an S corporation. At all relevant times, Mr. Lerner owned 49 percent and petitioners’ nephew Jason Ackerman owned 51 percent of Crown Capital. Crown Capital never issued any of its stock to Mr. Ackerman. At all relevant times, Crown Capital maintained books and records, had employees, and generated income.11 As discussed below, during at least certain of the years at issue, Crown Capital provided certain services, including “consultation, advice and direct management assistance * * * with respect to operations, strategic planning, [and] financing”, to certain companies in which Mr. Ackerman indirectly invested. In exchange for those services, those companies agreed to pay certain manage- ment fees to Crown Capital. 11 From 1997 until early 2002, Sheila Innes, an employee of Crown Capital, maintained Crown Capital’s books and records. Around early 2002, Crown Capital began winding down its business operations and shipped its books and records to Ms. Patriarca. - 14 - Mr. Ackerman, whose reputation in finance far exceeded the respective reputations of the employees of Crown Capital, was involved in the hiring of Crown Capital’s employees in that he told Crown Capital whom to hire or consented to its hiring of certain employees. By the end of 1997, Crown Capital had about 15 employees, including Mr. Lerner, Jason Ackerman, and Don Ackerman.12 In 1998, Mr. Deutschman joined Crown Capital and served as its managing director. It was Mr. Deutschman’s under- standing that Crown Capital was established to provide certain services regarding the various companies in which Mr. Ackerman invested or intended to invest. Mr. Lerner, Jason Ackerman, and Mr. Deutschman were the key employees of Crown Capital. Mr. Ackerman negotiated the respec- tive salaries that Crown Capital was to pay to those key employ- ees. Crown Capital filed Form 1120 for its taxable year 1997 and Form 1120S, U.S. Income Tax Return for an S Corporation (Form 1120S), for each of its taxable years 1998 and 2000.13 In each 12 The record does not disclose when Don Ackerman began working for Crown Capital. We presume that shortly after Don Ackerman stopped managing the operations of ECC, which was sometime around the end of 1997, he began working for Crown Capital. 13 The record does not disclose whether Crown Capital filed Form 1120S for any of the other taxable years at issue. - 15 - of those returns, Crown Capital showed its business activity as “CONSULTING” and its product or service as “INVESTMENT ADVICE”. In Form 1120 for its taxable year 1997, Crown Capital reported total income of $1,754,632, total deductions of $1,735,293, and taxable income of $19,339. In Form 1120S for its taxable year 1998, Crown Capital reported total income of $5,649,920, total deductions of $5,549,062, and “Ordinary income * * * from trade or business activities” of $100,858. In Form 1120S for its taxable year 2000, Crown Capital reported total income of $6,509,302, total deductions of $6,194,276, and “Ordi- nary income * * * from trade or business activities” of $315,026. Petitioners’ Tax Returns Petitioners jointly filed Form 1040, U.S. Individual Income Tax Return (joint return), for each of their taxable years 1997, 1998, 2000, 2002, and 2004. Petitioners included Schedule C, Profit or Loss From Busi- ness (Schedule C), as part of the 1997 joint return (1997 Sched- ule C), the 1998 joint return (1998 Schedule C), the 2000 joint return (2000 Schedule C), the 2002 joint return (2002 Schedule C), and the 2004 joint return (2004 Schedule C). In each of those schedules, petitioners showed the “Principal business or profession, including product or service” as “INVESTMENTS AND BANKING” and the “Business name” as “PETER ACKERMAN”. - 16 - Petitioners also included Schedule E, Supplemental Income and Loss (Schedule E), as part of the 1997 joint return, the 1998 joint return, the 2000 joint return, the 2002 joint return, and the 2004 joint return. In each of those schedules, petitioners reported, inter alia, Somerville S Trust’s allocable share of any income or loss, including any dividend income, from each of the limited liability companies in which that trust directly or indirectly invested.14 Notices of Deficiency On April 26, 2006, respondent issued to petitioners a notice of deficiency with respect to their taxable years 1997, 1998, and 2000 (notice for 1997, 1998, and 2000). On November 17, 2006, respondent issued to petitioners a notice of deficiency with respect to their taxable years 2002 and 2004 (notice for 2002 and 2004). Claimed Business Expense Deductions During the years at issue, various individuals and companies sought Mr. Ackerman’s advice with respect to certain projects that those individuals and companies were considering. Mr. 14 For convenience, instead of referring to what was reported by petitioners as Somerville S Trust’s allocable share of any income or loss, including any dividend income, from each of the limited liability companies in which that trust directly or indirectly invested, we shall generally refer only to the tax reporting by those limited liability companies which are involved in certain of the issues presented and in which Somerville S Trust was a direct or indirect investor. - 17 - Ackerman and Crown Capital’s key employees (namely, Mr. Lerner, Jason Ackerman, and Mr. Deutschman) examined each of those pro- jects in order to determine whether it was a project that Mr. Ackerman wanted to pursue. Mr. Ackerman and Crown Capital’s key employees (namely, Mr. Lerner, Jason Ackerman, and Mr. Deutschman) examined a total of about six to ten potential pro- jects for every project that Mr. Ackerman decided to pursue. It was Mr. Ackerman who determined which employees of Crown Capital were to work on the projects that he wanted to pursue. During the years at issue, Mr. Ackerman pursued at least five major projects (major projects).15 As discussed in more detail below, each of those projects pertained to a company in which Mr. Ackerman indirectly made a substantial investment.16 As part of its business, Crown Capital (1) provided certain due 15 Except for a project that pertained to a company that purchased cellular phone spectrum licenses and that was facing financial difficulty, the record does not disclose the number or the nature of any projects, other than the five major projects, that Mr. Ackerman may have explored and/or pursued during the years at issue. 16 Mr. Ackerman did not directly own an interest in any of the companies to which the major projects pertained. Instead, as discussed in more detail below, Mr. Ackerman invested in each of those companies through one or more entities in which he directly or indirectly owned a substantial interest, such as Somerville S Trust, Somerville, and Santa Monica. Although Mr. Ackerman did not directly own an interest in any of the companies to which the major projects pertained, in discussing those projects, we shall sometimes for convenience not describe Mr. Ackerman’s investments and ownership interests in those companies as indirect invest- ments and indirect ownership interests. - 18 - diligence services in connection with the major projects and (2) monitored the progress of Mr. Ackerman’s respective invest- ments in the companies to which those projects pertained. Mr. Ackerman maintained no books and records with respect to the projects that he pursued during the years at issue. Nor did he have any employees or lease agreements with respect to those projects. One major project that Mr. Ackerman pursued involved the financing of a resort theater business. On a date not disclosed by the record, Mr. Lerner introduced Mr. Ackerman to an individ- ual (resort theater developer) who had been in the process of acquiring a small chain of movie theaters located in certain resort areas and who had been having difficulty financing those acquisitions. On February 18, 1999, Santa Monica, virtually all of which Mr. Ackerman owned indirectly, invested $14 million in Resort Theaters of America, Inc. (Resort Theaters), in exchange for a 100-percent ownership interest in Resort Theaters. On the same date, Crown Capital entered into a management services agreement with Resort Theaters (Resort Theaters management service agree- ment). Pursuant to that agreement, in exchange for certain fees to be paid by Resort Theaters to Crown Capital, Crown Capital was to provide to Resort Theaters certain management services, in- cluding “consultation, advice and direct management assistance to - 19 - * * * [Resort Theaters] with respect to operations, strategic planning, financing and other aspects of the business of [Resort Theaters]”. On certain dates not disclosed by the record, Crown Capital and Mr. Ackerman assisted the resort theater developer in obtain- ing certain financing for Resort Theaters.17 The business operations of Resort Theaters were ultimately unsuccessful, and it did not pay to Crown Capital any of the fees required by the Resort Theaters management service agreement. Santa Monica reported in Form 1065 for its taxable year 2000 a long-term capital loss of $14 million with respect to its investment in Resort Theaters.18 Another major project that Mr. Ackerman pursued involved the formation of an investment management company. Mr. Ackerman learned of that project through Jay Regan (Mr. Regan), whom Mr. Ackerman had known for many years. On a date not disclosed by the record in or shortly before 1999, Mr. Regan introduced Mr. Ackerman to Marek Fludzinski (Mr. 17 The record does not disclose whether Mr. Ackerman assisted Resort Theaters in obtaining financing before or after Santa Monica invested in that company. 18 In Form 1065 for its taxable year 2000, Santa Monica reported with respect to its investment in Resort Theaters that (1) it had acquired its interest in Resort Theaters on Feb. 18, 1999; (2) its basis in that interest was $14 million; and (3) it had sold that interest on Dec. 31, 2000. In that form, Santa Monica made no entry in the column headed “Sales price” with respect to the interest in Resort Theaters that it reported it had sold. - 20 - Fludzinski). Mr. Fludzinski had been managing a fund for a large investment partnership and wanted to leave that partnership in order to start his own investment management business. From 1999 to 2000, Mr. Ackerman assisted Mr. Fludzinski in an undisclosed manner in forming Thales Fund Management, LLC (Thales Fund Man- agement), which was to be the manager of an investment company called Thales Fund, LP (Thales Fund). Mr. Ackerman asked Mr. Lerner to provide assistance with respect to certain of the legal matters pertaining to the formation of Thales Fund Management. On a date not disclosed by the record, Mr. Ackerman and Mr. Regan made investments of $30 million and $20 million, respectively, with respect to the project involving the creation of Thales Fund Management.19 Another major project that Mr. Ackerman pursued involved starting a towel manufacturing business in Mexico for Davidson Cotton Holding Corp. (Davidson Cotton). Mr. Ackerman 19 The record does not establish what ultimately happened to the investment of $30 million that Mr. Ackerman made with respect to the project involving the creation of Thales Fund Management. Nor does the record establish the specific entity or entities in which or through which Mr. Ackerman made that investment. However, Somerville reported in Form 1065 distributive shares of taxable income generated by the operations of (1) Thales Fund Management and Thales Capital, LLC (Thales Capital), for each of Somerville’s taxable years 1999 through 2004 and (2) Thales Fund, for each of Somerville’s taxable years 1999, 2000, 2002, and 2004. We presume from Somerville’s Form 1065 for each of its taxable years 1999 through 2004 that Mr. Ackerman made his investment of $30 million through Somerville. - 21 - learned of that project through his brother Don Ackerman shortly after Don Ackerman began working for Crown Capital. On December 3, 1999, Mr. Ackerman invested in Davidson Cotton.20 On the same date, Crown Capital entered into a manage- ment services agreement with Davidson Cotton (Davidson Cotton management services agreement). Pursuant to that agreement, in exchange for certain fees to be paid by Davidson Cotton to Crown Capital, Crown Capital was to provide to Davidson Cotton certain “executive management services, including consultation, advice and direct management assistance * * * with respect to opera- tions, strategic planning, financing and other aspects of the business of” Davidson Cotton. On certain dates not disclosed by the record, the key em- ployees of Crown Capital (namely, Mr. Lerner, Jason Ackerman, and Mr. Deutschman) and Mr. Ackerman assisted Davidson Cotton in starting a towel manufacturing business in Mexico. The business operations of Davidson Cotton were ultimately unsuccessful, and the company was liquidated. Davidson Cotton was able to pay to Crown Capital only a portion of the fees required by the Davidson Cotton management services agreement.21 20 Our detailed findings of fact with respect to Mr. Ackerman’s investment in Davidson Cotton are set forth in the attached appendix A, which is incorporated herein. 21 The record does not disclose what ultimately happened to Mr. Ackerman’s investment in Davidson Cotton. - 22 - Another major project that Mr. Ackerman pursued involved assisting a company known as Equity Marketing, Inc. (Equity Marketing),22 in making certain unidentified acquisitions. In early 2000, Equity Marketing, through one of Mr. Ackerman’s former colleagues at Drexel, approached Mr. Ackerman and asked him to make an investment in the company and to provide advice with respect to the acquisitions that Equity Marketing was seek- ing to make. Mr. Ackerman asked Jason Ackerman, Mr. Deutschman, and Mr. Lerner to perform certain due diligence services in order to determine whether Equity Marketing was a company in which Mr. Ackerman should invest. Sometime before March 22, 2000, Mr. Ackerman decided to invest in Equity Marketing through Somerville, and on that date Mr. Ackerman made that investment (discussed in more detail below). From 2000 to 2008, Mr. Ackerman provided certain advice to Equity Marketing regarding the acquisitions that it was seek- ing to make. On March 22, 2000, Somerville formed Crown Acquisition Partners, LLC (Crown Acquisition Partners). On March 29, 2000, Crown Acquisition Partners entered into a securities purchase agreement (Equity Marketing securities purchase agreement) with Equity Marketing. That agreement provided that on March 29, 2000, Equity Marketing was to sell to Crown Acquisition for 22 Equity Marketing was a marketing/advertising agency lo- cated in Los Angeles, Cal. - 23 - $11,900,000 (1) certain shares of series A preferred stock in Equity Marketing, (2) certain warrants to purchase certain shares of series B preferred stock in Equity Marketing, and (3) certain warrants to purchase certain shares of series C preferred stock in Equity Marketing. The Equity Marketing securities purchase agreement also provided that “as soon as practicable” Equity Marketing was to sell to Crown Acquisition Partners for $13,100,000 (1) certain additional shares of series A preferred stock in Equity Marketing, (2) certain warrants to purchase certain additional shares of series B preferred stock in Equity Marketing, and (3) certain warrants to purchase certain addi- tional shares of series C preferred stock in Equity Marketing. As part of its agreement to sell to Crown Acquisition Part- ners certain shares of stock in Equity Marketing and certain warrants to purchase certain other shares of stock in Equity Marketing, Equity Marketing agreed to pay to Crown Acquisition Partners, or any of its affiliates, including Crown Capital, a total commitment fee of $1,250,000 in 20 quarterly installments of $62,500. As required by the Equity Marketing securities purchase agreement, from June 30, 2000, to March 31, 2005, Equity Marketing paid to Crown Capital that $1,250,000 commitment fee in 20 quarterly installments of $62,500. On April 28, 2000, Crown Acquisition Partners changed its name to Crown Emak Partners, LLC (Crown Emak Partners). On a - 24 - date not disclosed by the record, Somerville contributed its interest in Crown Emak Partners to Crown Emak Investments, LLC (Crown Emak Investments).23 As of June 13, 2000, the members of Crown Emak Investments were Somerville, Crown Emak Holdings, LLC (Crown Emak Holdings), and J. Rothschild Nominees (Guernsey) Limited.24 Crown Emak Investments issued to Somerville Schedule K-1, Partner’s Share of Income, Credits, Deductions, etc. (Schedule K- 1), for each of Somerville’s taxable years 2000 through 2006. Each of those schedules showed dividend income paid by Equity 23 As of June 13, 2000, the members of Crown Emak Partners were Crown Emak Investments, Allen Ba (Mr. Ba), Chris Calise (Mr. Calise), and Ken Squire (Mr. Squire). Mr. Ba, Mr. Calise, and Mr. Squire were employed by Crown Capital when they became members of Crown Emak Partners. Crown Emak Investments, which was the managing member of Crown Emak Partners, owned a 99.31- percent interest in Crown Emak Partners, which it had received in exchange for its contribution to Crown Emak Partners of $24,828,541. 24 Somerville owned a 79.96-percent interest in Crown Emak Investments, which it had received in exchange for its contribu- tion to Crown Emak Investments of $8,090,000 and its interest in Crown Emak Partners valued at $11,900,000. Crown Emak Holdings owned a .04-percent interest in Crown Emak Investments, which it had received in exchange for its contribution to Crown Emak Investments of $10,000. J. Rothschild Nominees (Guernsey) Limited owned the remaining 20-percent interest in Crown Emak Investments, which it had received in exchange for its contribu- tion to Crown Emak Investments of $5 million. As of July 17, 2003, the members of Crown Emak Holdings were Somerville, Jason Ackerman, Mr. Deutschman, Mr. Lerner, Mr. Squire, Michael Leraris (Mr. Leraris), Suneel Kaji (Mr. Kaji), and J. Rothschild Nominees (Guernsey) Limited. Jason Ackerman, Mr. Deutschman, Mr. Lerner, Mr. Squire, Mr. Leraris, and Mr. Kaji were employees of Crown Capital when they became members of Crown Emak Holdings. - 25 - Marketing to Crown Emak Partners with respect to the preferred stock that Crown Emak Partners had acquired pursuant to the Equity Marketing securities purchase agreement. That dividend income was the only income reported in the Schedule K-1 that Crown Emak Investments issued to Somerville for each of Somerville’s taxable years 2001 through 2004.25 Crown Emak Holdings issued to Somerville Schedule K-1 for each of Somerville’s taxable years 2000 through 2006. Each of those schedules showed dividend income paid by Equity Marketing to Crown Emak Partners with respect to the preferred stock that Crown Emak Partners had acquired pursuant to the Equity Marketing securities purchase agreement.26 Another major project that Mr. Ackerman pursued involved starting an Internet grocery business. The initial concept of 25 The respective Schedules K-1 that Crown Emak Investments issued to Somerville for Somerville’s taxable years 2001 through 2004 are part of the record. The respective Schedules K-1 that Crown Emak Investments issued to Somerville for Somerville’s taxable years 2000, 2005, and 2006 are not part of the record. Thus, we do not know whether there was any income reported in any of those schedules other than the dividend income paid by Equity Marketing to Crown Emak Partners with respect to the preferred stock that Crown Emak Partners had acquired pursuant to the Equity Marketing securities purchase agreement. 26 The respective Schedules K-1 that Crown Emak Holdings issued to Somerville for Somerville’s taxable years 2000 through 2006 are not part of the record. Thus, we do not know whether there was any income reported in any of those schedules other than the dividend income paid by Equity Marketing to Crown Emak Partners with respect to the preferred stock that Crown Emak Partners had acquired pursuant to the Equity Marketing securities purchase agreement. - 26 - that business originated with Jason Ackerman. Beginning around 1999, Mr. Ackerman, Crown Capital under the leadership of Jason Ackerman, and Joe Fedele, a supermarket executive hired by Mr. Ackerman and Crown Capital, spent approximately two years in creating a business plan for an Internet grocery business. Around 2000, Mr. Ackerman, Crown Capital, and/or Joe Fedele formed Fresh Direct Holdings, Inc. (Fresh Direct), to operate that business. From the formation of Fresh Direct until early 2006, Mr. Ackerman served as chairman of the board of directors of Fresh Direct. In early 2006, Mr. Ackerman resigned as chairman of that board but continued to serve as a member thereof.27 On a date not disclosed by the record, Mr. Ackerman invested in Fresh Direct by purchasing 83 percent of the shares of stock in that corporation for a penny a share. Thereafter, Mr. Ackerman contributed at least certain of those shares to Crown Fresh Direct, LLC (Crown Fresh Direct), that had been formed by Somerville on March 1, 2000.28 27 In 2006, Rick Braddock (Mr. Braddock) became the chairman of the board of directors of Fresh Direct. On a date not dis- closed by the record before the date on which Mr. Braddock became the chairman of that board, he had invested in, and entered into an agreement to provide certain consulting services to, Fresh Direct. 28 Our detailed findings of fact with respect to the owner- ship of Crown Fresh Direct and certain other related entities are set forth in the attached appendix B, which is incorporated herein. - 27 - On a date not disclosed by the record before September 2002, C. Gregory Earls (Mr. Earls), a well-known businessman in Wash- ington, D.C., whom Mr. Ackerman had known since 1995 or 1996,29 informed Mr. Ackerman that he had certain clients that would be interested in investing in Fresh Direct. Thereafter, Mr. Earls and Mr. Ackerman each attempted to raise funds for that corpora- tion. Mr. Ackerman successfully raised a substantial amount of funds for Fresh Direct. Mr. Earls advised Mr. Ackerman to place those funds in an escrow account in the name of Mr. Earls, which Mr. Ackerman did. (We shall refer to the funds that Mr. Ackerman raised for Fresh Direct and placed into that escrow account as the Fresh Direct investor funds in escrow.) On April 12, 2000, Crown Capital and Fresh Direct entered into a management services agreement (Fresh Direct management services agreement), and on April 29, 2003, they entered into an amended and restated management services agreement (Fresh Direct amended management services agreement). Pursuant to those agree- ments, Crown Capital was to provide to Fresh Direct advisory and consulting services in relation to the affairs of * * * [Fresh Direct] in connection with strategic financial planning, and other services, in- cluding, without limitation, advisory and consulting services relating to the selection, supervision and retention of independent auditors, the selection, re- tention and supervision of outside legal counsel, and the selection, retention and supervision of investment bankers or other financial advisors or consultants. 29 Mr. Ackerman met Mr. Earls when Mr. Ackerman’s son was in the same class at Harvard University as Mr. Earls’s daughter. - 28 - In exchange for the services that Crown Capital provided to Fresh Direct, Fresh Direct paid to Crown Capital the fees required by the Fresh Direct management services agreement and the Fresh Direct amended management services agreement. During each of the years at issue, Mr. Ackerman, through Somerville S Trust, made payments to Crown Capital of the funds that Crown Capital requested in order to assist it in carrying on its business activities.30 The total amount of payments that Mr. Ackerman made to Crown Capital during each of those years was: Year Total Payment 1 1997 $1,954,632 1998 7,300,000 2 2000 6,687,520 3 2002 2,254,747 2004 1,000,000 1 Of the $1,954,632 that Mr. Ackerman paid to Crown Capital during 1997, $200,000 pertained to a failed attempt to establish an insurance company. 2 Of the $6,687,520 that Mr. Ackerman paid to Crown Capital during 2000, $1,827,418 pertained to certain unidentified aban- doned projects. 3 Of the $2,254,747 that Mr. Ackerman paid to Crown Capital during 2002, $663,520 pertained to certain unidentified abandoned projects. The practice that Crown Capital followed in requesting funds from Mr. Ackerman was to send an invoice for the funds requested to Ms. Patriarca, who, as discussed above, handled the bookkeep- 30 The record does not establish how Crown Capital treated for book and tax purposes the payments that Mr. Ackerman made to it during each of the years at issue. - 29 - ing for Somerville S Trust.31 After obtaining Mr. Ackerman’s approval, Ms. Patriarca had the funds requested sent to Crown Capital. During each of petitioners’ taxable years 1997, 1998, 2000, and 2002, Mr. Ackerman made payments to Rockport Advisors of certain funds that it requested.32 The total amount of payments that Mr. Ackerman paid to Rockport Advisors during each of those years was:33 Year Total Payment 1997 $587,500 1998 950,000 2000 1,235,876 2002 500,000 During each of the years at issue, Mr. Ackerman did not provide advisory services with respect to the major projects in 31 The invoices that Crown Capital sent to Ms. Patriarca are not part of the record. 32 The record not establish how Rockport Advisors treated for book and tax purposes the payments that Mr. Ackerman made to it during each of petitioners’ taxable years 1997, 1998, and 2002. However, we note that the amount of “Gross receipts or sales” that Rockport Advisors reported in its Form 1120 for its taxable year 1998 is equal to the total amount of the payments that Mr. Ackerman made to Rockport Advisors during that year. As for petitioners’ taxable year 2000, Rockport Advisors booked the total amount of the payments that Mr. Ackerman made to it during that year as “ADVISORY FEE INCOME”, and Rockport Advisors re- ported that amount as “Gross receipts or sales” in its Form 1120 for that year. 33 The record does not disclose any other information regard- ing Mr. Ackerman’s payments to Rockport Advisors during 1997, 1998, 2000, and 2002. Nor does the record disclose whether Mr. Ackerman made any payments to Rockport Advisors during petition- ers’ taxable year 2004. - 30 - exchange for a fee or a commission or with the purpose of selling his interests in the respective companies involved in those projects in the ordinary course of any business of his. Nor did Mr. Ackerman provide advisory services with respect to the major projects during any of those years in exchange for any other compensation other than the normal investor’s return. As discussed above, in petitioners’ Schedule C for each of the years at issue, petitioners showed the “Principal business or profession, including product or service” as “INVESTMENTS AND BANKING” and the “Business name” as “PETER ACKERMAN”. Mr. Ackerman maintained no books and records with respect to the activity reflected in each of those schedules. In the 1997 Schedule C, petitioners reported no income in part I and claimed $2,752,132 as “Other expenses” in part II consisting of payments of (1) $1,954,632 to Crown Capital, (2) $587,500 to Rockport Advisors, and (3) $210,000 to Nevada Media Partners. In that schedule, petitioners claimed a net loss of $2,752,132. In determining the taxable income reported in the 1997 joint return, petitioners deducted that net loss. In the 1998 Schedule C, petitioners reported no income in part I and claimed $8,250,000 as “Other expenses” in part II consisting of payments of (1) $7,300,000 to Crown Capital and (2) $950,000 to Rockport Advisors. In that schedule, petitioners claimed a net loss of $8,250,000. In determining the taxable - 31 - income reported in the 1998 joint return, petitioners deducted that net loss. In the 2000 Schedule C, petitioners reported no income in part I and claimed $7,973,649 as “Other expenses” in part II consisting of (1) $50,253 of expenses for a book that Mr. Ackerman had coauthored on nonviolent resistance34 (Mr. Ackerman’s book on nonviolent resistance) and (2) payments of (a) $6,687,520 to Crown Capital and (b) $1,235,876 to Rockport Advisors. In that schedule, petitioners claimed a net loss of $7,973,649. In determining the taxable income reported in the 2000 joint return, petitioners deducted that net loss. In the 2002 Schedule C, petitioners reported no income in part I and claimed $2,754,747 as “Other expenses” in part II consisting of payments of (1) $2,254,747 to Crown Capital and (2) $500,000 to Rockport Advisors. In that schedule, petitioners reported a net loss of $2,754,747. In determining the taxable income reported in the 2002 joint return, petitioners deducted that net loss. In the 2004 Schedule C, petitioners reported no income in part I and claimed $1 million as “Other expenses” in part II consisting of a payment of that amount to Crown Capital. In that schedule, petitioners reported a net loss of $1 million. In 34 The $50,253 of expenses pertaining to Mr. Ackerman’s book on nonviolent resistance consisted of expenses for certain research and publicity and an unidentified “book purchase”. - 32 - determining the taxable income reported in the 2004 joint return, petitioners deducted that net loss. In the notice for 1997, 1998, and 2000 and the notice for 2002 and 2004 (collectively, the notices), respondent determined that (1) the “Other expenses” that petitioners claimed in Sched- ule C “are not attributable to an active trade or business under IRC Section 162”, (2) those expenses are deductible as “expenses related to the production or collection of income under IRC Section 212 subject to the 2 percent floor for miscellaneous deductions”, and (3) therefore petitioners should have reported those expenses in Schedule A--Itemized Deductions (Schedule A) instead of Schedule C.35 Claimed Deduction for the Protection of Business Reputation In 1918, the maternal grandfather of Don Ackerman and of Mr. Ackerman started a business that was the predecessor of ECC. In 1964, the father of Don Ackerman and of Mr. Ackerman incorporated ECC, a supplier of wallpaper sample books and sample cards for paint, rugs, and wood pieces. Around 1965, when the grandfather, the father, and the uncle of Don Ackerman and of Mr. Ackerman 35 With respect to the payment of $210,000 to Nevada Media Partners that petitioners deducted in the 1997 Schedule C, the parties agree that that payment constituted a capital expendi- ture. They further agree that that $210,000 should not have been deducted in the 1997 Schedule C but should have been included as part of Somerville S Trust’s basis in its interest in Santa Monica. - 33 - developed certain health problems, Don Ackerman took over the management of ECC. Funds Advanced to ECC During the early 1990s, ECC operated a successful business. It generated annual revenue of approximately $25 million and had approximately 1,500 employees. By 1997, at a time when Don Ackerman and Jason Ackerman owned ECC,36 that company faced dire financial circumstances that were due in large part to a reduced need for wallpaper sample books. On a date in 1997 not disclosed by the record before May 7, Don Ackerman approached his brother Mr. Ackerman and informed him that ECC was unable to meet its payroll obligations, that ECC and/or Don Ackerman had accrued a substantial amount of bank debt, and that ECC and Don Ackerman might have to commence a bankruptcy proceeding. Mr. Ackerman, who was not a stockholder, guarantor, em- ployee, or officer of ECC, decided to advance certain funds to ECC. On the dates indicated, Mr. Ackerman, through Somerville S Trust, advanced to ECC the following amounts totaling $7,850,000 ($7,850,000 of advanced funds):37 36 The record does not disclose when Don Ackerman and Jason Ackerman acquired their respective stock interests in ECC. 37 Although Mr. Ackerman advanced a total of $7,850,000 to ECC through Somerville S Trust, in discussing Mr. Ackerman’s advancing those funds, we shall sometimes for convenience not (continued...) - 34 - Date Amount 5/7/1997 $1,000,000 6/3/1997 1,000,000 7/2/1997 1,000,000 7/30/1997 2,400,000 8/29/1997 500,000 9/26/1997 500,000 10/28/1997 600,000 11/6/1997 100,000 11/21/1997 750,000 ECC never repaid the funds that Mr. Ackerman advanced to it. Around the time in 1997 Mr. Ackerman had decided to advance, and was advancing, $7,850,000 to ECC, a decision had been made to form International Service Investors, LLC (ISI), International Service Group, LLC (ISG), and International Service Group Hold- ings, LLC (ISGH),38 in order to continue the operations of ECC in modified form.39 Around the same time, Mr. Ackerman also decided 37 (...continued) indicate that Mr. Ackerman advanced those funds through Somerville S Trust. 38 ISI, ISG, and ISGH were formed on the following dates: Entity Date of Formation ISI 8/27/1997 ISG 8/29/1997 ISGH 11/1/1997 39 The parties generally refer to ISI, ISG, and ISGH as the “International Group”. In describing the activities of the International Group in their stipulation of facts, the parties do not make clear whether each of the three companies making up the International Group engaged in those activities. It appears from the record that ISG was the only company engaged in manufacturing (continued...) - 35 - to make, and was making, through Somerville an investment of $18,050,000 in the International Group by investing that amount in ISI.40 Those funds enabled ISI and the other companies making up the International Group to conduct their operations. As of December 31, 1997, Somerville owned a 98-percent interest, ECC owned a 1-percent interest, and New Cumberland Corporation, Inc. (New Cumberland),41 owned a 1-percent interest in ISI. In exchange for the 1-percent interest in ISI that ECC owned as of December 31, 1997, ECC contributed all of its assets (discussed below) totaling $15,190,903, but none of its liabili- ties, to ISI.42 As of December 31, 1997, ISI owned a 1-percent interest and ISGH, in which ISI owned a 75-percent interest,43 owned a 99-percent interest in ISG. 39 (...continued) operations. When referring to one or more of the companies making up the group that the parties refer to as the “Interna- tional Group”, we shall sometimes for convenience use the termi- nology that the parties use. 40 The record does not disclose the specific date in 1997 on which Somerville invested $18,050,000 in ISI. 41 At all relevant times, Don Ackerman owned New Cumberland. 42 As of Dec. 31, 1997, ISI was the sole stockholder of ECC. The record does not disclose how, or the specific date on which, ISI acquired its stock interest in ECC. 43 As of Dec. 31, 1997, Jason Ackerman and Mr. Deutschman each owned a 7-percent interest, New Cumberland owned a 3.75- percent interest, and Crown Capital owned a 7.25-percent interest in ISGH. - 36 - Included in the assets that ECC contributed to ISI were a substantial, but undisclosed, amount of cash, substantial amounts of inventory, certain accounts receivable, certain intangible assets in the form of customer relationships, certain employee relationships, certain leasehold interests, and substantial amounts of machinery and equipment that ECC had used in the production of sample cards and packaging projects. The assets that ECC contributed to ISI assisted the International Group in continuing the operations of ECC in modified form. After the International Group was formed and received from Mr. Ackerman, through Somerville, over $18 million and from ECC over $15 million of assets, the International Group made certain fundamental changes to ECC’s business model and continued ECC’s business in modified form. For example, the International Group engaged in the manufacture of Pokemon cards and the business of creating packaging for various companies. From at least 1998 through 2003, Mr. Deutschman managed the day-to-day business operations of the International Group from the International Group’s offices in New Jersey. At all relevant times, the International Group carried out its operations in New Jersey, New York City, Texas, and/or Mexico. In 1999, at least certain of the manufacturing operations of the International Group were moved from New Jersey to Mexico. - 37 - Book and Tax Treatment of the $7,850,000 of Advanced Funds by Somerville and by Santa Monica At the direction of Mr. Lerner, Somerville S Trust booked the $7,850,000 of advanced funds as a loan from Somerville S Trust to ECC. Consistent with Somerville S Trust’s treatment of the $7,850,000 of advanced funds in its books, ECC booked those funds as a loan from Somerville S Trust to ECC. In Schedule L, Balance Sheets per Books (Schedule L), of Form 1120 for each of its taxable years ended November 30, 1998 (1998 Schedule L), and November 30, 1999, ECC included the $7,850,000 of advanced funds as part of its “Other liabilities”.44 In Schedule M-1, Reconcili- ation of Income (Loss) per Books With Income per Return, of Form 1120 for its taxable year ended November 30, 2000, ECC included the $7,850,000 of advanced funds as book income from the “CANCEL- LATION OF DEBT”. On December 16, 1997, Somerville S Trust contributed to Somerville a loan receivable (contributed loan receivable) with respect to the $7,850,000 of advanced funds. Somerville S Trust’s basis in its interest in Somerville included the value of that loan receivable, and the contributed loan receivable was among the assets held by Somerville when Somerville S Trust contributed its interest in Somerville to Santa Monica on Decem- ber 29, 1997. 44 In the 1998 Schedule L, ECC incorrectly identified the amount of the ECC funds as $7,750,000, instead of $7,850,000. - 38 - In Schedule L of Form 1065 that it prepared, but did not file,45 for each of its taxable years 1997, 1998, and 1999, Somerville included the contributed loan receivable as part of its “Other current assets”. In Form 1065 that it prepared, but did not file, for its taxable year 2000, Somerville claimed an “Ordinary * * * (loss) from trade or business activities” of $9,171,171 (Somerville’s claimed 2000 ordinary loss). In calcu- lating that loss, Somerville deducted a bad debt of $7,850,000 with respect to the contributed loan receivable. On July 2, 2001, Santa Monica, which owned all of Somerville, filed Form 1065 for its taxable year 2000. In that form, Santa Monica claimed an “Ordinary * * * (loss) from trade or business activities” of $10,344,426 (Santa Monica’s claimed 2000 ordinary loss). That ordinary loss that Santa Monica claim- ed included Somerville’s claimed 2000 ordinary loss.46 Santa Monica’s claimed 2000 ordinary loss was allocated as follows: 99.88 percent to Somerville S Trust, .059 percent to Rockport 45 See supra note 7. 46 The parties stipulated that Santa Monica’s claimed 2000 ordinary loss included “an ordinary loss in the amount of $91,171,171 from Somerville LLC.” That stipulation is clearly contrary to the facts that we have found are established by the record, and we shall disregard it. See Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989). The record establishes, and we have found, that Santa Monica’s claimed 2000 ordinary loss included Somerville’s claimed 2000 ordinary loss of only $9,171,171. - 39 - Capital, and .059 percent to Perry Lerner.47 In Schedule E of their 2000 joint return, petitioners reported Somerville S Trust’s and Rockport Capital’s respective allocable shares of Santa Monica’s claimed 2000 ordinary loss.48 On or about August 8, 2005, petitioners and respondent executed Form 872, Consent to Extend the Time to Assess Tax (Form 872), in which they consented to extend to December 31, 2006, the time within which to assess petitioners’ tax for their taxable year 2000. That Form 872 did not provide that it applied to any tax of petitioners attributable to the partnership items of Santa Monica. Santa Monica did not execute Form 872-P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items, with respect to its taxable year 2000. In the second amended petition at docket No. 13947-06, petitioners alleged as an affirmative issue that the $7,850,000 of advanced funds is deductible under section 162(a) for peti- tioners’ taxable year 1997. 47 Before 2000, Santa Monica, Somerville, and petitioners did not claim any deductions with respect to the $7,850,000 of advanced funds. 48 The record does not disclose whether Mr. Lerner reported in his tax return for his taxable year 2000 his allocable share of Santa Monica’s claimed 2000 ordinary loss. - 40 - Claimed Losses With Respect to ISI From around early 1998 through 2003, Mr. Deutschman, who lived in New York City, had a leadership role in each of the companies (i.e., ISI, ISG, and ISGH) that made up the Interna- tional Group.49 During each of those years, Mr. Deutschman spent more than 500 hours managing the day-to-day business operations of the International Group. Mr. Deutschman performed his manage- ment activities with respect to the business operations of the International Group from the International Group’s offices in New Jersey. No person spent more time managing the business opera- tions of the International Group than Mr. Deutschman. During at least 1998 and 2000, Don Ackerman and Jason Ackerman also provided certain unidentified management services to the International Group. Mr. Ackerman, who during the years at issue lived in Wash- ington, D.C., was not an employee or officer of any of the compa- nies that made up the International Group, did not receive any wages from any of those companies, and did not maintain a log documenting the amount of time that he devoted to any of those companies. During 1998 through 2000, Mr. Ackerman communicated on various occasions with Mr. Deutschman regarding various matters, 49 For example, from 1998 through 2003, Mr. Deutschman served as president of ISI. - 41 - including the business operations and finances of the Interna- tional Group and various other investments of Mr. Ackerman. Mr. Deutschman sent Mr. Ackerman at least one memorandum dated July 9, 1999, regarding the business operations of the International Group that served as a basis for discussions between the two of them. During 1998 through 2000, Mr. Ackerman spent at least one or two days in certain weeks in New York City. During that period, he also visited New Jersey where his mother and his brother Don Ackerman lived. While in New York City, Mr. Ackerman spent time on various matters, including matters relating to certain of the major projects in which Crown Capital was involved and certain charitable activities relating to CARE. While in New Jersey, Mr. Ackerman, inter alia, occasionally visited Mr. Deutschman where Mr. Deutschman managed the operations of the International Group. ISI issued to Somerville Schedule K-1 with respect to each of Somerville’s taxable years 1998 (1998 ISI Schedule K-1 issued to Somerville) and 2000 (2000 ISI Schedule K-1 issued to Somerville). In the 1998 ISI Schedule K-1 issued to Somerville, ISI showed an “Ordinary * * * (loss) from trade or business activities” of $6,983,996 (1998 ISI loss). In the 2000 ISI Schedule K-1 issued to Somerville, ISI showed an “Ordinary * * * (loss) from trade or business activities” of $1,771,427 (2000 ISI loss). - 42 - In the 1998 joint return and the 2000 joint return, peti- tioners treated Mr. Ackerman’s allocable portions of the respec- tive 1998 ISI loss and 2000 ISI loss as passive activity losses. In the second amended petition at docket No. 13947-06, petition- ers alleged as an affirmative issue that the “losses deducted by Petitioners as passive losses [with respect to ISI] should be allowed as active because Mr. Ackerman materially participated in this business activity throughout the years of the deductions.” Claimed Theft Loss Deduction Around 1996 or 1997, Mr. Earls approached Mr. Ackerman with a proposal to invest in U.S. Technologies, Inc. (U.S. Technolo- gies), a publicly traded Delaware corporation that used prison labor to manufacture a variety of products. Mr. Ackerman be- lieved that such an investment would be profitable. On June 22, 1998, USV Partners, LLC (USV), was formed for the purpose of acquiring and holding shares of preferred and common stock of U.S. Technologies. At all relevant times, Mr. Earls was the sole director, officer, and employee of USV and controlled all of its funds. Pursuant to various subscription agreements, from July 10, 1998, through August 27, 2001, Mr. Ackerman, through Somerville S Trust, invested funds totaling $4,467,610 in USV. Pursuant to those agreements, those invested funds were to be used by USV to purchase shares of common and/or preferred stock in U.S. Technol- - 43 - ogies.50 On March 4, 2002, USV distributed to Somerville S Trust 18,759,879 shares of common stock in U.S. Technologies. Around September 2002, Mr. Ackerman asked Mr. Earls to return to him the Fresh Direct investor funds in escrow (dis- cussed above). Mr. Earls was unable to do so because he had removed from escrow at least certain of those funds. Mr. Ackerman gave Mr. Earls a deadline by which he had to return to him the full amount of the Fresh Direct investor funds in escrow. Mr. Earls borrowed a certain amount of money and returned to Mr. Ackerman the full amount of those funds by the deadline that Mr. Ackerman set. When Mr. Ackerman learned that Mr. Earls had removed from escrow certain of the Fresh Direct investor funds in escrow, Mr. Ackerman began to question whether Mr. Earls had properly handled the funds that Mr. Ackerman, through Somerville S Trust, had invested in USV. On a date not disclosed by the record before December 9, 2002, Mr. Ackerman learned that Mr. Earls had used for his own personal benefit certain of the funds that Mr. Ackerman, through Somerville S Trust, and other members of USV had invested in USV. Shortly thereafter, Mr. Ackerman informed a 50 On a date not disclosed by the record, Mr. Lerner also invested certain funds in USV. Like the funds that Mr. Ackerman, through Somerville S Trust, invested in USV, the funds that Mr. Lerner invested in USV were to be used by USV to purchase shares of common and/or preferred stock in U.S. Technologies. - 44 - district attorney in New York51 of Mr. Earls’s conduct with re- spect to those funds. On December 9, 2002, in an effort to recover damages of approximately $5,953,000, Somerville S Trust and certain other persons who owned interests in USV filed a complaint (December 9, 2002 complaint) in the United States District Court for the District of Maryland (U.S. District Court for Maryland) against David Ferreira (Mr. Ferreira) and Ferreira & Isbell, LLC (Ferreira & Isbell). (We shall refer to that civil action as the Ferreira litigation.) In the December 9, 2002 complaint, the plaintiffs in the Ferreira litigation alleged, inter alia, that the defendants identified in that complaint had “negligently and recklessly failed to exercise due care in performing their review of USV’s general ledgers and trial balances, in making any ad- justments thereto, and in performing other accounting services for USV.” On December 18, 2002, criminal complaints were filed against Mr. Earls in the United States District Court for the Southern District of New York. Thereafter, on March 24, 2003, Mr. Earls, who was accused of stealing $13 million of $20 million that had been invested in USV, was indicted in that court on one count of 51 The record does not disclose which district attorney’s office in New York Mr. Ackerman informed of Mr. Earls’s conduct with respect to the funds that Mr. Ackerman, through Somerville S Trust, and other members of USV had invested in USV. - 45 - securities fraud, 19 counts of wire fraud, and two counts of mail fraud. On June 17, 2003, Mr. Ackerman executed a formal engagement letter for representation by the law firm of Jenner & Block, LLC (Jenner & Block), in connection with the Ferreira litigation and certain other litigation against Mr. Earls in the Superior Court of the District of Columbia. On August 19, 2003, Somerville S Trust entered into three respective securities and purchase agreements with (1) Mr. Lerner, (2) WS Investments, LP (WS Investments), and (3) certain family trusts that were established for the benefit of certain members of Mr. Ackerman’s family (Ackerman family trusts).52 Pursuant to the securities and purchase agreement entered into by Somerville S Trust and Mr. Lerner, that trust was to acquire from Mr. Lerner for a total purchase price of $150,000 (1) any member- ship interests in USV and shares of stock in U.S. Technologies that Mr. Lerner owned and (2) any claims that Mr. Lerner had against Mr. Earls or any of Mr. Earls’s affiliates with respect to any fraudulent conduct of Mr. Earls concerning those member- ship interests and shares of stock. Pursuant to the securities and purchase agreement entered into by Somerville S Trust and WS 52 On a date not disclosed by the record before Mr. Ackerman’s discovery of Mr. Earls’s conduct with respect to the funds invested in USV, Somerville S Trust had transferred as gifts small portions of its USV membership interest to the Ackerman family trusts. - 46 - Investments, that trust was to acquire from WS Investments for a total purchase price of $200,000 (1) any membership interests in USV and shares of stock in U.S. Technologies that WS Investments owned and (2) any claims that WS Investments had against Mr. Earls or any of Mr. Earls’s affiliates with respect to any fraud- ulent conduct of Mr. Earls concerning those membership interests and shares of stock. Pursuant to the securities and purchase agreement entered into by Somerville S Trust and the Ackerman family trusts, Somerville S Trust was to acquire from those family trusts for a total purchase price of $50,000 (1) any membership interests in USV and shares of stock in U.S. Technolo- gies that the Ackerman family trusts owned and (2) any claims that the Ackerman family trusts had against Mr. Earls or any of Mr. Earls’s affiliates with respect to any fraudulent conduct of Mr. Earls concerning those membership interests and shares of stock. On August 21, 2003, in an effort to recover damages of at least $5,952,860, Somerville S Trust, which was represented by Jenner & Block, filed a complaint (August 21, 2003 complaint) in the United States District Court for the District of Columbia (U.S. District Court for the District of Columbia) against, inter alia, Mr. Earls, USV Partners, and U.S. Technologies. The claims set forth in the August 21, 2003 complaint included the claims that were assigned to Somerville S Trust by Mr. Lerner, WS In- - 47 - vestments, and the Ackerman family trusts pursuant to the respec- tive securities and purchase agreements described above. Somerville S Trust alleged in that complaint, inter alia, that Mr. Earls had “devised and implemented a fraudulent investment scheme by which he embezzled and misappropriated funds from investors for his own personal benefit.” On November 26, 2003, the parties involved in the Ferreira litigation filed a stipulation of dismissal in the U.S. District Court for Maryland. By letter dated March 19, 2004, Jenner & Block sent Mr. Ackerman a check in the amount of $1,882.73, which had been recovered from a personal bank account of Mr. Earls. In that letter, Jenner & Block advised Mr. Ackerman that “We have re- cently served additional subpoenas and attachment orders on various banks where Earls had or has accounts”. On April 23, 2004, Mr. Earls was convicted on all 22 counts on which he had been indicted on March 24, 2003, and was sen- tenced to prison for ten years. By letter dated January 11, 2005, Jenner & Block sent Mr. Ackerman a check in the amount of $772.86, which had been recov- ered from another personal bank account of Mr. Earls. In that letter, Jenner & Block advised Mr. Ackerman of the difficulties and prohibitive costs of recovering any more funds from that account. - 48 - On a date not disclosed by the record, Somerville S Trust received a memorandum dated February 14, 2005, that had been sent to the common shareholders of U.S. Technologies by an individual named Adam Joseph (Mr. Joseph).53 Mr. Joseph concluded in that memorandum: “Given the outstanding liabilities of the company and the illiquid state of the remaining investment portfolio, I am not optimistic that * * * [U.S. Technologies] shareholders will realize value.” On May 26, 2005, Somerville S Trust filed a motion to dis- miss the August 21, 2003 complaint against Mr. Earls, USV Part- ners, and U.S. Technologies.54 On June 6, 2005, the U.S. District Court for the District of Columbia granted that motion. From around 2002 through 2005, petitioners paid more than $2.2 million in legal and investigative fees pursuing recovery of any losses sustained as a result of any fraudulent conduct of Mr. Earls with respect to the funds invested in USV. In the 2002 joint return, petitioners claimed a long-term capital loss of $4,467,610 with respect to the funds that Mr. Ackerman, through Somerville S Trust, invested in USV. In the 53 The record does not disclose any other information regard- ing Mr. Joseph. 54 As discussed above, Somerville S Trust alleged in the August 21, 2003 complaint, inter alia, that Mr. Earls had “de- vised and implemented a fraudulent investment scheme by which he embezzled and misappropriated funds from investors for his own personal benefit.” - 49 - 2004 joint return, petitioners again claimed a long-term capital loss in the same amount with respect to that investment. In the notice for 2002 and 2004, respondent did not make any determinations regarding the long-term capital loss of $4,467,610 that petitioners claimed in both the 2002 joint return and the 2004 joint return with respect to the funds that Mr. Ackerman, through Somerville S Trust, invested in USV. In the amended petition at docket No. 26400-06, petitioners acknowledged that they are not entitled to deduct that long-term capital loss for both of their taxable years 2002 and 2004. In that amended petition, petitioners further alleged as an affirmative issue that the long-term capital loss that they claimed in both the 2002 joint return and the 2004 joint return with respect to the funds that Mr. Ackerman, through Somerville S Trust, invested in USV is “deductible as a theft loss” for their taxable year 2002. Accuracy-Related Penalty Under Section 6662(a) Joseph Miller (Mr. Miller) prepared petitioners’ joint return for each of the years at issue. Ms. Patriarca was respon- sible for sending to Mr. Miller certain records and schedules that were pertinent to the preparation of each of those returns. Grant Thornton, LLP (Grant Thornton), prepared the respec- tive tax returns of Somerville, Santa Monica, and Crown Capital for each of the years at issue. - 50 - In February 2001, respondent began an examination of peti- tioners’ taxable years 1997, 1998, and 2000 (examination of 1997, 1998, and 2000). The only issue involved in that examination was whether the “Other expenses” that petitioners claimed in Schedule C for each of their taxable years 1997, 1998, and 2000 should have been claimed in Schedule A instead of Schedule C. Howard Levinton (Mr. Levinton), an accountant who has been employed by Grant Thornton since 1987, represented petitioners with respect to the examination of their taxable years 1997, 1998, and 2000. Mr. Levinton presented to respondent’s revenue agent (revenue agent) who was assigned to that examination cer- tain information that that agent requested. During the examination of 1997, 1998, and 2000, Mr. Levinton also presented to the revenue agent an amended joint return for petitioners’ taxable year 1999 (1999 amended joint return). In that amended return, petitioners claimed a refund of $1,857,106. Petitioners included Schedule C as part of the 1999 amended joint return (1999 Schedule C). In that schedule, petitioners showed the “Principal business or profession, including product or service” as “INVESTMENTS AND BANKING” and the “Business name” as “PETER ACKERMAN”. In the 1999 Schedule C, petitioners made no entries in the section entitled “Income” and claimed “Other expenses” of $9,694,269 consisting of “INVESTMENT ADVISORY FEES” of that amount. Petitioners explained in the 1999 amended joint - 51 - return that “TAXPAYERS INCORRECTLY DEDUCTED INVESTMENT ADVISORY FEES AS AN ITEMIZED DEDUCTION RATHER THAN DEDUCTING THEM AS A TRADE OR BUSINESS EXPENSE ON SCHEDULE C.”55 Around September 2002, respondent issued to petitioners a 30-day letter with respect to their taxable years 1997, 1998, and 2000 (respondent’s 30-day letter). In October 2002, Mr. Levinton, on petitioners’ behalf, appealed to respondent’s Ap- peals Office (Appeals Office) the adjustments proposed in that letter (petitioners’ appeal). Mr. Levinton continued to repre- sent petitioners throughout that appeal process. Around early 2005, over a year after petitioners filed the 2002 joint return on November 21, 2003, Mr. Levinton informed Mr. Lerner of respondent’s position with respect to petitioners’ claimed Schedule C expenses for 1997, 1998, and 2000. Sometime thereafter in 2005, Mr. Levinton asked Mr. Lerner to accompany Mr. Levinton to a conference with the Appeals Office (Appeals Office conference) regarding the adjustments proposed in respon- dent’s 30-day letter with respect to those years.56 55 In view of respondent’s position on the claimed Schedule C deductions that are at issue in these cases, we presume that respondent did not approve the refund that petitioners claimed in the 1999 amended joint return. 56 The Appeals Office conference that Mr. Levinton asked Mr. Lerner to attend was rescheduled from a date in 2005 not dis- closed by the record to a date in December 2005 not disclosed by the record. - 52 - Mr. Ackerman had discussions with Mr. Levinton and Mr. Lerner regarding the propriety of petitioners’ claimed Schedule C deductions. Mr. Ackerman had those discussions (1) with Mr. Levinton on a date not disclosed by the record after respondent began the examination of 1997, 1998, and 2000 but before peti- tioners filed the 2002 joint return and (2) with Mr. Lerner57 on a date in 2005 not disclosed by the record after Mr. Levinton informed him about respondent’s position with respect to peti- tioners’ claimed Schedule C deductions for 1997, 1998, and 2000 and over a year after petitioners filed the 2002 joint return. When Mr. Ackerman discussed the propriety of petitioners’ claimed Schedule C deductions with Mr. Levinton and Mr. Lerner, he informed them that the expenses for which petitioners claimed those deductions were “for my business” and “Basically to create business, to create revenue”. Based upon what Mr. Ackerman told them, Mr. Levinton and Mr. Lerner advised Mr. Ackerman that they believed that petitioners’ claimed Schedule C deductions were proper. In December 2005, the Appeals Office held the Appeals Office conference with Mr. Levinton and Mr. Lerner regarding the adjust- 57 It is not clear from the record whether Mr. Levinton was present at the discussions that Mr. Ackerman had with Mr. Lerner regarding the propriety of petitioners’ claimed Schedule C deductions. - 53 - ments proposed in respondent’s 30-day letter with respect to petitioners’ taxable years 1997, 1998, and 2000. At a time not disclosed by the record before November 17, 2006, respondent began an examination of petitioners’ taxable years 2002 and 2004. Neither Mr. Levinton nor Mr. Lerner was involved in that examination. As discussed above, in the notice for 1997, 1998, and 2000 and the notice for 2002 and 2004, respondent determined (1) that petitioners’ claimed Schedule C expenses “are not attributable to an active trade or business under IRC Section 162”, (2) that those expenses are deductible under section 212 subject to the 2- percent floor imposed by section 67(a), and (3) that therefore petitioners should have reported those expenses in Schedule A instead of Schedule C. In the notice for 2002 and 2004, respon- dent also determined that petitioners are liable for each of their taxable years 2002 and 2004 for the accuracy-related pen- alty under section 6662(a).58 The respective accuracy-related penalties under section 6662(a) that respondent determined for petitioners’ taxable years 2002 and 2004 are imposed on respec- tive underpayments for those years that are attributable solely to respondent’s disallowance of petitioners’ respective Schedule 58 In the notice for 1997, 1998, and 2000, respondent did not determine that petitioners are liable for the accuracy-related penalty under sec. 6662(a). - 54 - C deductions claimed in the 2002 joint return and the 2004 joint return. OPINION Burden of Proof Petitioners do not dispute that they bear the burden of proof with respect to (1) the affirmative issues that they raised in the pleadings and that remain at issue and (2) the determina- tions in the notice for 2002 and 2004 to impose the accuracy- related penalty. Nor do petitioners dispute that they bear the burden of proof with respect to the determinations in the notices to disallow their claimed Schedule C deductions. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Petition- ers argue, however, that the burden of proof with respect to the determinations to disallow those claimed deductions shifts to respondent under section 7491(a). In order for the burden of proof to shift to the Commis- sioner of Internal Revenue under section 7491(a), the taxpayer must (1) provide credible evidence with respect to any factual issue relevant to determining the tax liability of the taxpayer and (2) comply with the applicable requirements of section 7491(a)(2). Although section 7491(a) does not define the term “credible evidence”, the legislative history of the statute does. The legislative history of section 7491(a) states in pertinent part: - 55 - Credible evidence is the quality of evidence which, after critical analysis, the court would find suffi- cient upon which to base a decision on the issue if no contrary evidence were submitted (without regard to the judicial presumption of IRS correctness). * * * The introduction of evidence will not meet this standard if the court is not convinced that it is worthy of belief. * * * H. Conf. Rept. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994- 995. In support of their argument that the burden of proof shifts to respondent under section 7491(a) with respect to the determi- nations in the notices to disallow their claimed Schedule C deductions, petitioners assert: The extensive testimony of Mr. Ackerman and others about his Schedule C activity certainly constitutes “credible evidence” with respect to all pertinent fac- tual issues. No expense was challenged for lack of substantiation or failure to maintain records. * * * Accordingly, the burden of proof on this issue should shift to respondent. * * * Respondent counters that Petitioners rely heavily on the testimony of petitioner and related individuals, much of which was overly broad, vague, misleading, and uncorroborated by any documentary evidence. This testimony does not consti- tute credible evidence under section 7491(a)(1). * * * Furthermore, section 7491(a)(2) specifies certain re- quirements that must be met before section 7491(a)(1) can apply. Specifically, the taxpayer must have main- tained all records required by the Internal Revenue Code. I.R.C. § 7491(a)(2)(B). * * * Petitioner did not maintain any books or records with respect to his Schedule C activity. * * * As discussed below, there are material factual issues rele- vant to determining whether petitioners are entitled under sec- - 56 - tion 162(a) to their claimed Schedule C deductions as to which they have not introduced credible evidence within the meaning of section 7491(a)(1).59 On the record before us, we find that the burden of proof does not shift to respondent under section 7491(a) with respect to any factual issues that pertain to the Schedule C deductions that petitioners are claiming for each of the years at issue. Evaluation of Evidence on Which Petitioners Rely Petitioners rely on certain testimonial evidence and certain documentary evidence in order to satisfy their burden of proof with respect to each of the issues presented. Testimonial Evidence The testimonial evidence on which petitioners rely is the respective testimonies of Mr. Ackerman, Mr. Lerner, Jason Ackerman, Don Ackerman, Mr. Deutschman, Mr. Levinton, Mr. Braddock, and Ms. Patriarca. 59 Assuming arguendo that petitioners had introduced credible evidence within the meaning of sec. 7491(a)(1) with respect to the factual issues relevant to determining whether petitioners are entitled under sec. 162(a) to their claimed Schedule C deductions, the burden of proof with respect to that issue nonetheless would not shift to respondent under sec. 7491(a)(1). That is because we have found that Mr. Ackerman maintained no books and records with respect to the activity reflected in petitioners’ Schedule C for each of the years at issue. See sec. 7491(a)(2)(B). - 57 - Mr. Ackerman’s Testimony We found the testimony of Mr. Ackerman to be in certain material respects general, conclusory, vague, ambiguous, confus- ing, questionable, self-serving, and/or evasive. We shall not rely on Mr. Ackerman’s testimony to establish petitioners’ re- spective positions on the various issues to which that testimony pertained. Mr. Lerner’s Testimony We found the testimony of Mr. Lerner to be in certain mate- rial respects vague, ambiguous, questionable, and/or serving the interests of his longtime associate Mr. Ackerman, who retained Mr. Lerner to provide certain legal services for him and who played a significant role in enabling Mr. Lerner to be employed by Crown Capital. We shall not rely on Mr. Lerner’s testimony to establish petitioners’ respective positions on the various issues to which that testimony pertained. Don Ackerman’s Testimony We found the testimony of Don Ackerman to be in certain material respects general, conclusory, vague, ambiguous, ques- tionable, and/or serving the interests of his brother Mr. Ackerman, who played a significant role in enabling Don Ackerman to be employed by Crown Capital after the business of ECC that Don Ackerman was managing began facing dire financial circum- - 58 - stances.60 We shall not rely on Don Ackerman’s testimony to establish petitioners’ respective positions on the various issues to which that testimony pertained. Jason Ackerman’s Testimony We found the testimony of Jason Ackerman to be in certain material respects vague, ambiguous, questionable, and/or serving the interests of his uncle and longtime associate Mr. Ackerman, who played a significant role in enabling Jason Ackerman to be employed by Crown Capital. We shall not rely on Jason Ackerman’s testimony to establish petitioners’ respective positions on the various issues to which that testimony pertained. Mr. Deutschman’s Testimony We found the testimony of Mr. Deutschman to be in certain material respects vague, ambiguous, questionable, and/or serving the interests of his longtime associate Mr. Ackerman, who played a significant role in enabling Mr. Deutschman to be employed by Crown Capital. We shall not rely on that testimony to establish petitioners’ respective positions on the various issues to which that testimony pertained. Ms. Patriarca’s Testimony We generally found the testimony of Ms. Patriarca to be credible. However, that testimony, together with other reliable 60 See supra note 12. - 59 - evidence in the record, did not enable us to sustain petitioners’ position on any of the issues to which that testimony pertained. Mr. Braddock’s Testimony We generally found the testimony of Mr. Braddock to be credible. However, that testimony, together with other reliable evidence in the record, did not enable us to sustain petitioners’ position on the issue to which that testimony pertained. Mr. Levinton’s Testimony We found the testimony of Mr. Levinton to be questionable in certain material respects. We shall not rely on Mr. Levinton’s testimony to establish petitioners’ respective positions on the various issues to which that testimony pertained. Documentary Evidence The documentary evidence on which petitioners rely includes, inter alia, the notices, the respective tax returns of petition- ers and certain entities that petitioners directly or indirectly owned, certain written agreements,61 certain travel itineraries of Mr. Ackerman, and certain newspaper articles regarding Mr. Earls. Although the documentary evidence on which petitioners rely is voluminous, that documentary evidence, together with the reliable 61 The written agreements on which petitioners rely include, inter alia, the Equity Marketing securities purchase agreement and certain management service agreements entered into between Crown Capital and each of certain corporations in which Mr. Ackerman invested. - 60 - testimonial evidence in the record, did not enable us to sustain petitioners’ position on any of the issues presented. Claimed Business Expense Deductions It is petitioners’ position that the claimed Schedule C expenses that remain at issue are deductible under section 162(a).62 In support of that position, petitioners argue that Mr. Ackerman incurred those expenses in carrying on the business of advising companies about their finances and management.63 It is respondent’s position that the claimed Schedule C expenses that remain at issue are deductible under section 212(1) and that therefore those expenses are subject to the 2-percent floor imposed by section 67(a). In support of that position, respondent argues that Mr. Ackerman incurred the claimed Schedule 62 Virtually all of the expenses that petitioners claimed in Schedule C for each of their taxable years 1997, 1998, 2000, 2002, and 2004 and that remain at issue, see supra note 35, consist of payments that Mr. Ackerman made during each of those years to Rockport Advisors and/or Crown Capital. The only expenses that remain at issue and that do not consist of payments to Rockport Advisors and/or Crown Capital are $50,253 of expenses for Mr. Ackerman’s book on nonviolent resistance that petitioners claimed in the 2000 Schedule C. See supra note 34. The parties agree, and we have found, that petitioners paid $50,253 of expenses for that book. However, petitioners make no argument as to why they are entitled for their taxable year 2000 to deduct those expenses under sec. 162(a). We conclude that petitioners have abandoned that argument. 63 For convenience, we shall sometimes refer to Mr. Ackerman’s claimed business of advising companies about their finances and management as the alleged business of providing advisory services. - 61 - C expenses that remain at issue as an investor and not in carry- ing on a trade or business within the meaning of section 162(a). Section 162(a) generally allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 212(1) allows an individual a deduction for ordinary and necessary expenses paid or incurred during the taxable year for the production or collec- tion of income. In support of their claim that during each of the years at issue Mr. Ackerman was engaged in the business of advising compa- nies about their finances and management, petitioners presented evidence with respect to the major projects64 and advance what we understand to be two arguments.65 We address each of those argu- ments below. Petitioners’ Cost Company or Agency Argument As we understand it, petitioners are arguing that during each of the years at issue Rockport Advisors and/or Crown Capital were cost companies and/or agents of Mr. Ackerman. Consequently, 64 See supra note 15. The record does not disclose what portion of petitioners’ claimed Schedule C deductions for each of the years at issue that remains at issue pertained to the major projects. 65 We found petitioners’ arguments on brief in support of their position that during each of the years at issue Mr. Ackerman was engaged in the business of providing advisory services and that therefore the claimed Schedule C expenses are deductible under sec. 162(a) to be confusing. We state our understanding of those arguments. - 62 - according to petitioners, they are entitled for each of the years at issue to deduct under section 162(a) the respective payments that Mr. Ackerman made during each of those years to Rockport Advisors and/or Crown Capital. It is not clear from petitioners’ briefs whether petitioners are arguing (1) that during each of the years at issue Rockport Advisors and/or Crown Capital were cost companies of Mr. Ackerman and that therefore those companies were his agents or (2) that during each of those years Rockport Advisors and/or Crown Capital were Mr. Ackerman’s agents regard- less of whether they were cost companies of Mr. Ackerman. On the record before us, we reject both arguments. We turn first to whether, as petitioners appear to be argu- ing, Rockport Advisors and/or Crown Capital were cost companies of Mr. Ackerman and that therefore those companies were his agents during each of the years at issue. In support of that argument, petitioners rely on Revenue Ruling 56-542, 1956-2 C.B. 327 (Revenue Ruling 56-542). In that ruling, the Internal Reve- nue Service (Service) concluded that the stockholders of a cap- tive mining company (mining company) that had been established as a cost company were entitled to certain depletion deductions under section 611 of the Internal Revenue Code of 1954. In Revenue Ruling 77-1, 1977-1 C.B. 161 (Revenue Ruling 77- 1), the Service revoked Revenue Ruling 56-542. As a result, petitioners’ reliance on Revenue Ruling 56-542 is misplaced. In - 63 - Revenue Ruling 77-1, the Service concluded that “all corporations operating as cost companies” within the meaning of Revenue Ruling 56-542 “will be treated as separate taxpayers and will be re- quired to compute their own income, deductions, credits and tax liabilities.” Rev. Rul. 77-1, 1977-1 C.B. at 161. Even if the Service had not revoked Revenue Ruling 56-542 in Revenue Ruling 77-1, we nonetheless would, and do, conclude that petitioners’ reliance on Revenue Ruling 56-542 is misplaced. That is because the facts that we have found on the record before us are materially distinguishable from the facts involved in Revenue Ruling 56-542. Revenue Ruling 56-542 described the facts involved therein as follows: Certain manufacturing corporations, which require for their normal operations several grades and several kinds of ore, unite and join with other manufacturers in an arrangement for the acquisition, by fee or lease, of mining property and for the exploration, development and operation of such property. The manufacturers organize a corporation to own and operate the property, subscribe to the corporation’s capital stock, and ad- vance all funds needed both for capital and operative purposes. The mining company, referred to as a ‘cost company,’ executes a contract with its stockholding manufacturing corporations. The contract provides essentially that the participants, each in proportion to its stock ownership, shall advance all funds, both capital and operative, necessary for the mining company to operate and shall share in the same proportion in the ore produced. Under an agreement signed with its stockholding manufacturing corporations, the mining company will not sell any ore and will have no net income. Its operations, as well as the disposition of the products mined, will at all times be under the control of the participants. - 64 - Thus, the basic issue for consideration is whether the economic interest in the ore thus being produced, with the resultant right to claim depletion, is in the captive mining company or its stockholding corpora- tions. Rev. Rul. 56-542, 1956-2 C.B. at 327. In concluding in Revenue Ruling 56-542 that the stockholders of the mining company involved therein were entitled to certain depletion deductions under section 611 of the Internal Revenue Code of 1954, the Service indicated that the mining company must “file a corporate return showing no income and no deductions on its face, but containing schedules showing the gross income and deductions allocable” to its stockholders. Although during each of the years at issue Mr. Ackerman made certain payments to Rockport Advisors and/or Crown Capital, Mr. Ackerman was not a stockholder of those entities. Moreover, Rockport Advisors and Crown Capital did not file tax returns as cost companies described in Revenue Ruling 56-542 in which they claimed no income and no deductions. Instead, (1) Rockport Advisors filed Form 1120 for each of its taxable years 1997, 1998, and 200066 in which it reported income and deductions that were attributable to its business activities, and (2) Crown Capital filed Form 1120 for its taxable year 1997 and Form 1120S 66 See supra note 10. - 65 - for each of its taxable years 1998 and 200067 in which it reported income and deductions that were attributable to its business activities.68 On the record before us, we find that petitioners have failed to carry their burden of establishing that during each of the years at issue Rockport Advisors and/or Crown Capital were cost companies of Mr. Ackerman. We turn now to whether, as petitioners appear to be arguing, Rockport Advisors and/or Crown Capital were Mr. Ackerman’s agents during each of the years at issue regardless of whether they were cost companies of Mr. Ackerman. Petitioners state: “A taxpayer may deduct payments for business expenses made by * * * his agent on his behalf.”69 In support of that statement, petitioners cite, 67 See supra note 13. 68 Petitioners also rely on Kenco Rests., Inc. v. Commis- sioner, T.C. Memo. 1998-342, affd. 206 F.3d 588 (6th Cir. 2000), for the proposition that the “concept of centralizing costs for several projects in one entity still exists.” Petitioners’ reliance on that case is misplaced. Unlike the instant case, Kenco Rests., Inc. involved the reallocation under sec. 482 of deductions claimed by commonly controlled corporations, one of which had been established as a “cost company” that provided management and administrative support services to the remaining commonly controlled corporations there involved. Moreover, the “cost company” involved in Kenco Rests., Inc. is materially distinguishable from the cost company described in Rev. Rul. 56- 542, 1956-2 C.B. 327. 69 However, in these cases petitioners did not claim as Schedule C deductions the respective expenses that Rockport Advisors and/or Crown Capital incurred during each of the years at issue. Instead, petitioners claimed as Schedule C deductions (continued...) - 66 - inter alia, Commissioner v. Bollinger, 485 U.S. 340 (1988), in which the Supreme Court of the United States (Supreme Court) discussed and applied the four indicia and two requirements of corporate agency (discussed below).70 Although petitioners cite Bollinger, they do not analyze and apply those indicia and re- quirements to Rockport Advisors and to Crown Capital.71 Before turning to Commissioner v. Bollinger, supra, we shall consider Natl. Carbide Corp. v. Commissioner, 336 U.S. 422 (1949), the seminal case of the Supreme Court addressing how to determine the existence of a corporate agency. In addressing 69 (...continued) in the joint return for each of the years at issue certain payments that Mr. Ackerman made during each of those years to Rockport Advisors and/or Crown Capital, and Rockport Advisors and/or Crown Capital claimed as deductions in their respective tax returns the respective expenses that they incurred during each of those years. 70 In support of their statement that “A taxpayer may deduct payments for business expenses made by * * * his agent on his behalf”, petitioners also cite, inter alia, N.Y. Guandong Fin., Inc. v. Commissioner, T.C. Memo. 2008-62. In that case, we discussed and applied the four indicia and two requirements of corporate agency that the Supreme Court discussed and applied in Commissioner v. Bollinger, 485 U.S. 340, 346-347 (1988). We concluded in N.Y. Guandong Fin., Inc., that the facts therein did not establish the existence of a corporate agency. 71 In advancing what appears to be petitioners’ argument that Rockport Advisors and/or Crown Capital were cost companies of Mr. Ackerman and that therefore those companies were his agents during each of the years at issue, petitioners claim that “Crown [Capital] operated for the account of Mr. Ackerman”. If the record had established that “Crown [Capital] operated for the account of Mr. Ackerman”, which we find it does not, as discussed below, that alleged fact would have been an indicium of agency. - 67 - that issue, the Supreme Court set forth the following four indi- cia and two requirements that are to be considered in making such a determination: Whether the corporation operates in the name and for the account of the principal, binds the principal by its actions, transmits money received to the principal, and whether receipt of income is attributable to the services of employees of the principal and to assets belonging to the principal are some of the relevant considerations in determining whether a true agency exists. If the corporation is a true agent, its rela- tions with its principal must not be dependent upon the fact that it is owned by the principal, if such is the case. Its business purpose must be the carrying on of the normal duties of an agent. * * * [Fn. refs. omit- ted.] Id. at 437. (The above-quoted indicia and requirements of corpo- rate agency are commonly referred to, and we shall refer to them, as the six National Carbide factors.) In Natl. Carbide Corp., the Supreme Court applied the six National Carbide factors and concluded that the facts therein did not establish the existence of a corporate agency. In Commissioner v. Bollinger, supra, the Supreme Court again addressed how to determine whether a corporate agency exists. In addressing that issue, the Supreme Court restated the six Na- tional Carbide factors, id. at 346-347, and observed that those factors are designed to ensure “the genuineness of the agency relationship”, id. at 349. According to the Supreme Court, the genuineness of the agency relationship is ad- equately assured * * * when the fact that the corpora- tion is acting as agent for its shareholders with re- spect to a particular asset is set forth in a written - 68 - agreement at the time the asset is acquired, the corpo- ration functions as agent and not principal with re- spect to the asset for all purposes, and the corpora- tion is held out as the agent and not principal in all dealings with third parties relating to the asset. * * * Id. at 349-350. In Bollinger, the Supreme Court concluded that the facts therein established “the genuineness of the agency relationship”. Id. In order to determine whether Rockport Advisors and/or Crown Capital were Mr. Ackerman’s agents during each of the years at issue, we shall apply and analyze the six National Carbide fac- tors. We turn first to Rockport Advisors. As discussed above, the record is very sparse as to the activities of Rockport Advi- sors during each of the years at issue,72 including 1997, 1998, 2000, and 2002, the only years in which Mr. Ackerman made certain payments to that company that petitioners claimed as expenses in their respective Schedules C for those years.73 We note initially that the requirement included as one of the six National Carbide factors that the corporation’s “relations with its principal must not be dependent upon the fact that it is owned by the princi- pal”, Natl. Carbide Corp. v. Commissioner, supra at 437, is irrelevant to our resolving whether Rockport Advisors was Mr. Ackerman’s agent during each of petitioners’ taxable years 1997, 72 See supra note 9. 73 See supra note 33. - 69 - 1998, 2000, and 2002. That is because the parties do not dispute that during each of those years Mr. Ackerman did not have an ownership interest in Rockport Advisors. See Shenker v. Commis- sioner, 804 F.2d 109, 113 (8th Cir. 1986), affg. T.C. Memo. 1985- 301. With respect to the remaining five National Carbide factors, on the record before us, we find that petitioners have failed to carry their burden of establishing that during each of their taxable years 1997, 1998, 2000, and 2002 (1) Rockport Advisors acted in the name, and for the account, of Mr. Ackerman; (2) Rockport Advisors bound Mr. Ackerman by its actions; (3) Rockport Advisors transmitted money received to Mr. Ackerman; (4) the receipt of income by Rockport Advisors was attributable to the services of the employees of Mr. Ackerman and the assets belong- ing to Mr. Ackerman; or (5) the business purpose of Rockport Advisors was the carrying on of the normal duties of an agent. On the record before us, we find that petitioners have failed to carry their burden of establishing that during each of petitioners’ taxable years 1997, 1998, 2000, and 2002 Rockport Advisors was Mr. Ackerman’s agent. We turn now to Crown Capital. We note initially that, as was true with respect to Rockport Advisors, the requirement included as one of the six National Carbide factors that the corporation’s “relations with its principal must not be dependent - 70 - upon the fact that it is owned by the principal”, Natl. Carbide Corp. v. Commissioner, 336 U.S. at 437, is irrelevant to our resolving whether Crown Capital was Mr. Ackerman’s agent during each of the years at issue. That is because the parties do not dispute that during each of those years Mr. Ackerman did not have an ownership interest in Crown Capital. See Shenker v. Commis- sioner, supra at 113. With respect to the remaining five National Carbide factors, on the record before us, we find that petitioners have failed to carry their burden of establishing that during each of the years at issue (1) Crown Capital acted in the name, and for the ac- count, of Mr. Ackerman;74 (2) Crown Capital bound Mr. Ackerman by its actions; (3) Crown Capital transmitted money received to Mr. Ackerman; (4) the receipt of income by Crown Capital was attrib- utable to the services of the employees of Mr. Ackerman and the assets belonging to Mr. Ackerman;75 or (5) the business purpose of Crown Capital was the carrying on of the normal duties of an agent.76 74 See supra note 71. 75 Although Mr. Ackerman paid Crown Capital the funds that it requested in order to assist it in carrying on its business activities, after he did, those funds became the funds of Crown Capital and no longer belonged to Mr. Ackerman. 76 Moreover, on the record before us, we find that petition- ers did not establish the following facts that would have been helpful in ensuring “the genuineness of the [claimed] agency (continued...) - 71 - On the record before us, we find that petitioners have failed to carry their burden of establishing that during each of the years at issue Crown Capital was Mr. Ackerman’s agent. Petitioners’ Compensation Argument As we understand it, petitioners are arguing that during each of the years at issue Mr. Ackerman received compensation other than the normal investor’s return for the advisory services that he provided during each of those years with respect to the major projects. Consequently, according to petitioners, under applicable caselaw, during each of the years at issue Mr. Ackerman was engaged in a trade or business of providing advisory services within the meaning of section 162(a). The principal case on which petitioners rely to support that argument is Giblin v. Commissioner, 227 F.2d 692 (5th Cir. 1955), revg. T.C. Memo. 76 (...continued) relationship”, Commissioner v. Bollinger, 485 U.S. at 349, between Crown Capital and Mr. Ackerman: (1) There was a written agreement that set forth that Crown Capital was an agent of Mr. Ackerman during any of the years at issue; (2) Crown Capital functioned for any purpose as an agent with respect to the major projects that he pursued during those years; and (3) Crown Capital was held out as an agent of Mr. Ackerman in all dealings with third parties relating to those projects during those years. To the contrary, we have found that during the years at issue Crown Capital, in its own name, entered into various management service agreements with the respective companies involved in certain of the projects that Mr. Ackerman pursued. Pursuant to those agreements, in exchange for certain fees to be paid by those respective companies to Crown Capital, Crown Capital was to provide certain services to them. - 72 - 1954-186.77 According to petitioners, “Mr. Ackerman’s business was not dissimilar [to that of the taxpayer in Giblin], as he helped people create and structure transactions.” What petition- ers fail to understand or choose to ignore is that the fact that Mr. Ackerman may have “helped people create and structure trans- actions” in providing advisory services during the years at issue with respect to the major projects is not determinative of whether for each of those years he was engaged in a trade or business of providing those services within the meaning of sec- tion 162(a). In Giblin v. Commissioner, supra, the United States Court of Appeals for the Fifth Circuit (Court of Appeals for the Fifth Circuit) addressed whether the taxpayer “was regularly engaged in the business of seeking out business opportunities, promoting, organizing and financing them, contributing to them substantially 50% of his time and energy and then disposing of them either at a profit or loss”. The Court of Appeals for the Fifth Circuit held that the taxpayer was engaged in that business. In so holding, that Court relied on, inter alia, Foss v. Commissioner, 75 F.2d 77 Petitioners also rely on certain other cases to establish that during each of the years at issue Mr. Ackerman was engaged in a trade or business of providing advisory services within the meaning of sec. 162(a). We have carefully considered each of those other cases. We find all of them to be materially distin- guishable from the instant cases and petitioners’ reliance on them to be misplaced. - 73 - 326 (1st Cir. 1935), and Sage v. Commissioner, 15 T.C. 299 (1950). Giblin v. Commissioner, supra at 696. In Whipple v. Commissioner, 373 U.S. 193, 203 n.10 (1963), which the Supreme Court decided after Giblin, the Supreme Court expressly disapproved of any statements and holdings in Foss and Sage that were contrary to its statements and holdings in Whipple. In Whipple, the Supreme Court addressed whether a taxpayer who had furnished regular services to several corpora- tions in which he was an investor was engaged in an independent trade or business. The Supreme Court held that “Absent substan- tial additional evidence, furnishing management and other ser- vices to corporations for a reward not different from that flow- ing to an investor in those corporations is not a trade or busi- ness”. Id. at 203 (fn. ref. omitted). In so holding, the Su- preme Court stated: Devoting one’s time and energies to the affairs of a corporation is not of itself, and without more, a trade or business of the person so engaged. Though such activities may produce income, profit or gain in the form of dividends or enhancement in the value of an investment, this return is distinctive to the process of investing and is generated by the successful opera- tion of the corporation’s business as distinguished from the trade or business of the taxpayer himself. When the only return is that of an investor, the tax- payer has not satisfied his burden of demonstrating that he is engaged in a trade or business since invest- ing is not a trade or business and the return to the taxpayer, though substantially the product of his ser- vices, legally arises not from his own trade or busi- ness but from that of the corporation. Even if the taxpayer demonstrates an independent trade or business of his own, care must be taken to distinguish bad debt - 74 - losses arising from his own business and those actually arising from activities peculiar to an investor con- cerned with, and participating in, the conduct of the corporate business. If full-time service to one corporation does not alone amount to a trade or business, which it does not, it is difficult to understand how the same service to many corporations would suffice. To be sure, the pres- ence of more than one corporation might lend support to a finding that the taxpayer was engaged in a regular course of promoting corporations for a fee or commis- sion, * * * or for a profit on their sale, see Giblin v. Commissioner, 227 F.2d 692 * * *, but in such cases there is compensation other than the normal investor’s return, income received directly for his own services rather than indirectly through the corporate enterprise * * * Id. at 202-203. Although, as quoted above, the Supreme Court in Whipple cited Giblin v. Commissioner, 227 F.2d 692 (5th Cir. 1955), it cited Giblin only for the narrow proposition that “the presence of more than one corporation might lend support to a finding that the taxpayer was engaged in a regular course of promoting corpo- rations * * * for a profit on their sale”. Whipple v. Commis- sioner, supra at 202-203. In citing Giblin for that narrow proposition, the Supreme Court emphasized that in order to con- clude that a taxpayer is engaged in a trade or business “there * * * [must be] compensation other than the normal investor’s return, income received directly for * * * [the taxpayer’s] own services rather than indirectly through the corporate enter- prise”. Id. We must read Giblin in a manner that is consistent - 75 - with Whipple. We did so in Deely v. Commissioner, 73 T.C. 1081 (1980), a case that petitioners do not cite. In Deely, we addressed whether a taxpayer who had organized and financed 26 companies was engaged in the trade or business of promoting, organizing, financing, and/or dealing in corporations. We held in Deely that the taxpayer was not engaged in that trade or business. Id. at 1096. In so holding, we stated: In order to establish a business separate from that of his corporations, * * * [the taxpayer] must show that the compensation he seeks from his activities is other than the normal investor’s return and that income received is directly for his services rather than indirectly through the successful operation of the corporate enterprise. Whipple v. Commissioner, supra at 203. * * * [The taxpayer] contends that he was in the separate business of promoting, organizing, financing, and/or dealing in corporations. It seems clear from Whipple that to qualify such activities as a separate business they must be conducted for a fee or commission or with the immediate purpose of selling the corpora- tions at a profit in the ordinary course of that busi- ness. * * * There is no evidence in this case that * * * [the taxpayer] received any fees or commissions for organizing, financing, or promotional activities; instead, he usually invested or took an equity interest in the entities that he organized, promoted, or fi- nanced. * * * Id. at 1093. In reaching our holding in Deely v. Commissioner, supra at 1093, we considered Giblin v. Commissioner, supra. We concluded in Deely that in order to come within the holding in Giblin a taxpayer must show that the taxpayer organized the entities in which the taxpayer invested “with a view to a quick and profit- - 76 - able sale after each business had become established, rather than with a view to long-range investment gains.”78 Id. In contrast to the taxpayer in Giblin v. Commissioner, supra, petitioners do not claim, and presented no evidence, let alone credible evidence, see sec. 7491(a), establishing, that during each of the years at issue Mr. Ackerman provided advisory services pertaining to the finances and management of the respec- tive companies involved in the major projects with the purpose of selling his respective interests in those companies at a profit in the ordinary course of his alleged business of providing those services.79 We find Giblin to be materially distinguishable from the instant cases and petitioners’ reliance on that case to be misplaced. On the record before us, we find that petitioners have failed to carry their burden of establishing that during each of the years at issue Mr. Ackerman provided advisory services with respect to the major projects with the purpose of selling his 78 We observed in Deely v. Commissioner, 73 T.C. 1081, 1093 n.11 (1980), that “it would appear that Giblin v. Commissioner, 227 F.2d 692 (5th Cir. 1955), has been sapped of some of its vitality by the opinions of the Fifth Circuit in Bodzy v. Commis- sioner, 321 F.2d 331 (5th Cir. 1963); and United States v. Byck, 325 F.2d 551 (5th Cir. 1963).” 79 Indeed, on the record before us, we find that petitioners have failed to establish that Mr. Ackerman sold any of his respective interests in the companies involved in the major projects in the ordinary course of his alleged business of providing advisory services. - 77 - interests in the respective companies involved in those projects at a profit in the ordinary course of his alleged business of providing those services.80 See Whipple v. Commissioner, 373 U.S. at 202-203; Deely v. Commissioner, supra at 1093; cf. Giblin v. Commissioner, supra. We shall address now whether during each of the years at issue Mr. Ackerman provided advisory services with respect to each of the major projects in exchange for a fee or a commission or any other compensation other than the normal investor’s re- turn. See Whipple v. Commissioner, supra at 202-203; Deely v. Commissioner, supra at 1093. With respect to the major project pertaining to Equity Marketing (Equity Marketing project), petitioners claim that Mr. Ackerman received a fee in exchange for the advisory services that he provided with respect to that project.81 To support that claim, petitioners rely on the testimony of Mr. Ackerman on which we are unwilling to rely to establish petitioners’ position with respect to their claimed Schedule C deductions. In this regard, 80 See supra note 79. 81 Petitioners reported no income, let alone income from the Equity Marketing project, in Schedule C for each of the years at issue. Moreover, petitioners do not claim, and the record does not establish, that they reported in any other part of their joint returns for any of the years at issue the fee that peti- tioners claim Mr. Ackerman received in exchange for the advisory services that he provided with respect to the Equity Marketing project. - 78 - Mr. Ackerman testified that he received a fee in exchange for the advisory services that he provided with respect to the Equity Marketing project. Our understanding is that the fee to which Mr. Ackerman referred in his testimony is the commitment fee that Equity Marketing agreed to pay to Crown Acquisition Partners, or any of its affiliates, as part of Equity Marketing’s agreement to sell to Crown Acquisition Partners certain shares of its stock and certain warrants to purchase certain other shares of its stock. There is no reliable evidence in the record establishing that Equity Marketing was required to, and did, pay the commit- ment fee required in the Equity Marketing securities purchase agreement in exchange for any advisory services that Mr. Ackerman provided to Equity Marketing. We have found that that commitment fee was required to be paid to Crown Acquisition Partners or one of its affiliates as part of Equity Marketing’s agreement to sell to Crown Acquisition Partners certain shares of its stock and certain warrants to purchase certain other shares of its stock and that it was paid to Crown Capital, one of Crown Acquisition Partners’ affiliates. That commitment fee was not required to be, and was not, paid to Mr. Ackerman.82 82 The record does not establish, and petitioners do not even claim, that they reported in any of their joint returns for the years at issue the commitment fee required in the Equity Market- ing securities purchase agreement. See supra note 81. - 79 - Petitioners claim not only that Mr. Ackerman received a fee in exchange for the advisory services that he provided with respect to the Equity Marketing project, but also that he re- ceived dividends in exchange for those services. The parties do not dispute that petitioners received, and reported in their joint return for each of their taxable years 2000 through 2006, certain dividend income from Equity Marketing that had flowed through, inter alia, Somerville. Howeve [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4337541. Public record. Not legal advice.