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T.C. Memo. 2026-64

SCOTT L. REED AND STACY N. REED,

Petitioners

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket No. 13757-20.

Filed August 5, 2026.

__________

Tyler H. DeWitt and Clinton L. DeWitt, for petitioners.

Catherine S. Tyson, Andrew D. Reiter, and Philip Edward Blondin, for

respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

TORO, Judge: In this deficiency case, we must untangle the

federal income tax consequences of the complicated financial lives of

petitioners, Scott L. Reed and Dr. Stacy N. Reed. During the taxable

years 2012 through 2015 (years at issue), the Reeds received income

from myriad sources and were involved in projects including real estate

development, the starting of a medical practice, and sales of reclaimed

wood. Across the Reeds’ varied activities, recordkeeping left much to be

desired, and the Commissioner of Internal Revenue determined that the

Reeds (a) failed to properly report their income and (b) claimed

deductions and a credit to which they were not entitled. He also

determined that additions to tax and penalties apply. The Reeds contest

these determinations.

The parties having settled some issues, we are left to decide the

following: (1) whether the Reeds underreported income from various

sources; (2) whether the Reeds are entitled to deductions for (a) various

Served 08/05/26

[*2] payments and transfers, (b) amounts they paid to lease farmland,

and (c) amounts they claimed to have paid as interest; (3) whether the

Reeds are entitled to a general business credit for the taxable year 2012;

and (4) whether additions to tax and penalties apply to the Reeds for the

years at issue. As we explain in greater detail below, we conclude that

the Reeds have carried their burden of proof only with respect to some

of the issues that remain.

FINDINGS OF FACT

The following facts are derived from the pleadings, Stipulations

of Fact with attached Exhibits, as supplemented, and the testimony and

Exhibits admitted into evidence at trial.

The Reeds

Mr. Reed

Mr. Reed grew up around construction.

His father and

grandfather worked in construction, and beginning early in life he joined

them on jobsites as they built apartments, homes, and other buildings.

He studied at the University of California, Davis, and worked in

construction while he was a student.

After Mr. Reed graduated from college, he went to work as a real

estate consultant. He started his career at Arthur Andersen and later

worked for Standard & Poor’s.

Early in his career, Mr. Reed became a consultant for the United

States Navy. He assisted the Navy in disposing of closed bases,

including Naval Air Station Alameda Point and Naval Station Treasure

Island. In time, Mr. Reed began to specialize in real estate development

subsidized by tax credits, particularly credits for the development of

historic properties.

Mr. Reed eventually started his own firm, Reed Realty Advisors,

LLC. Reed Realty Advisors performed real estate consulting and real

estate development work for its clients.

Reed Realty Advisors was a single-member limited liability

company wholly owned by Mr. Reed and was treated as a disregarded

entity for federal tax purposes. Mr. Reed was the company’s managing

director. He worked alongside Alex Dzyuba, the company’s director of

construction, and Jake Spellmeyer, the company’s director of finance

[*3] and accounting. Mr. Spellmeyer later left Reed Realty Advisors to

start his own firm.

Mr. Reed’s work with the Navy continued through Reed Realty

Advisors. Reed Realty Advisors also consulted for the General Services

Administration and private-sector clients.

Reed Realty Advisors performed multiple functions for the real

estate development projects with which it was associated. In the early

stages of a project, it would assist in site selection and property

acquisition by conducting market research for the area near a

prospective building and measuring and modeling the building to

determine how it could be used in the future. Reed Realty Advisors often

hired Linda Hernandez, Mr. Reed’s mother, to measure and prepare

models for buildings of interest. At this stage, Reed Realty Advisors

would also engage land use consultants, accounting firms, or other

specialists to determine whether development would be viable.

Once construction was underway, Reed Realty Advisors would

coordinate contractors and monitor progress on the project. Reed Realty

Advisors often hired Bruce Reed, Mr. Reed’s father, to consult on

questions about construction. And it hired an entity separately owned

by Mr. Dzyuba to help import materials and fixtures.

As some projects concluded, Reed Realty Advisors advised

investors on how to wind up their involvement. At this stage of

development, Reed Realty Advisors sometimes obtained legal advice.

Neither party has introduced into evidence the complete books

and records of Reed Realty Advisors. Additionally, although Reed

Realty Advisors had its own bank account, during the years at issue,

Mr. Reed also used the Reeds’ personal bank accounts for deposits and

withdrawals related to Reed Realty Advisors.

Dr. Reed

Dr. Reed is a medical doctor. After starting medical school in New

York, she finished her degree at Oregon Health and Science University.

Dr. Reed then pursued her residency at the University of Arkansas for

Medical Sciences, and the Reeds moved to Little Rock, Arkansas, during

her residency.

After her residency, Dr. Reed returned to Portland, Oregon, to

work for Allergy, Asthma & Dermatology Associates. Mr. Reed joined

[*4] her there by the end of 2012. Later, Dr. Reed started her own

practice in Portland, Reed Dermatology Northwest.

The Reeds continued to live in Portland when they filed their

Petition.

II.

Mr. Reed’s Real Estate Activities

During the years at issue, Mr. Reed and Reed Realty Advisors

were involved in multiple real estate development projects in Arkansas

and Alabama. Three of those projects are relevant to this case: (1) Main

Street Lofts, (2) K Lofts, and (3) TJ Tower.

Main Street Lofts

Main Street Lofts, LLC (Main Street Lofts), was formed on

April 30, 2012. Mr. Reed held an interest in Main Street Lofts through

Reed Property Group 3, LLC, a disregarded entity. He was also a

manager of Main Street Lofts, which was treated as a partnership for

federal income tax purposes during the years at issue.

The Main Street Lofts project was located on Main Street in Little

Rock, Arkansas. Its properties included the Boyle Building at 500 Main

Street, the MM Cohn Building at 510 Main Street, the Arkansas Annex

at 514 Main Street, and the Arkansas Building at 524 Main Street.

Main Street Lofts acquired its properties in August 2012 for

$1.5 million.

Funding for the project came from various sources, including

investors in Main Street Lofts, bank financing, and tax credits from the

State of Arkansas. 1

Main Street Lofts’ bank financing came from Riverside Bank.

Main Street Lofts and Riverside Bank entered into a construction loan

agreement on July 22, 2013. Under that agreement, Main Street Lofts

could borrow up to $3,182,000 for the acquisition and improvement of

its properties. The Reeds guaranteed the construction loan, as did two

other individuals, Wooten Epes and Brian Corbell.

The Main Street Lofts project faced unforeseen challenges during

its development. In 2013 or 2014, for example, a fire broke out in one of

1 The State of Arkansas provides a historic rehabilitation income tax credit.

Ark. Code Ann. § 26-51-2204 (2025).

[*5] the project’s buildings. And in 2015, a truck accidentally pulled a

fire hydrant out of the ground in front of one of the buildings, causing

the building to flood.

One of the project’s greatest obstacles arose in 2015, when it

became clear that changes in the Arkansas law governing historic tax

credits would decrease the amount Main Street Lofts could claim in

future credits. See Ark. Code Ann. § 26-51-2204(a)(2) (limiting the

Arkansas historic rehabilitation income tax credit beginning March 20,

2015).

After the years at issue, the investors in Main Street Lofts ended

their involvement with the project through a transaction with an entity

called Deep Creek. 2

K Lofts

The K Lofts project was also located on Main Street in Little Rock.

K Lofts, LLC (K Lofts), purchased the building at 315 Main Street in

November 2010. Mr. Reed held an interest in K Lofts through K Lofts

Member One, LLC, a disregarded entity, and was a manager of K Lofts.

K Lofts was treated as a partnership for federal income tax purposes

during the years at issue.

As with the Main Street Lofts project, funding for the K Lofts

project came from investors, bank financing, and state tax credits. On

the banking front, K Lofts borrowed $1,375,000 from IBERIABANK.

Mr. Reed and Brian Corbell guaranteed the loan.

The K Lofts project faced challenges throughout its development.

For example, the back wall of the property collapsed while a void behind

it was being filled with concrete. Insurance covered a significant portion

of the costs associated with the wall’s collapse. Other setbacks—burst

pipes and break-ins, to name two—caused additional unanticipated

costs.

After the years at issue, Deep Creek acquired K Lofts. In the

transaction, Mr. Reed exchanged his interest in K Lofts for a

membership interest in Deep Creek.

2 The record does not reflect the precise structure of this transaction.

[*6]

TJ Tower

The TJ Tower project was coordinated through TJTOWER, LLC

(TJ Tower). The project was located in Birmingham, Alabama.

Mr. Reed indirectly held an interest in TJ Tower through Reed

Property Group 5, LLC, a disregarded entity. 3 TJ Tower issued a

Schedule K–1, Partner’s Share of Income, Deductions, Credits, etc., to

Reed Property Group 5 for 2015. That Schedule K–1 reflected, as

relevant here, interest income of $21,065.

Sales of Mr. Reed’s Interests

At various times in 2013, Mr. Reed sold some of his member units

in Main Street Lofts and K Lofts to third parties, as shown in the

following table:

Entity

Date of Sale

Number of Member

Units Sold

Amount

Realized

Main Street Lofts

January 7, 2013

$35,000

Main Street Lofts

January 18, 2013

35,000

K Lofts

January 22, 2013

85,000

K Lofts

January 23, 2013

17,000

K Lofts

February 11, 2013

17,000

K Lofts

April 29, 2013

102,000

On their 2013 tax return, the Reeds reported no gain or loss from

these sales.

III.

Payments and Transfers Made by Mr. Reed

Payments to Third Parties

During the years at issue, Mr. Reed used the Reeds’ personal

accounts to make multiple payments to third parties. The Reeds later

treated those payments as trade or business expenses of Reed Realty

3 Reed Property Group 5 also owned TJ Manager, LLC, another disregarded

entity that held an interest in TJ Tower.

[*7] Advisors. See Opinion Part IV.A below. At trial, the parties agreed

on the occurrence, timing, and amounts of such payments. 4

Transfers to the Projects

Mr. Reed also transferred funds to Main Street Lofts and K Lofts

from the Reeds’ personal accounts. In 2014 and 2015, Mr. Reed

transferred approximately $811,000 from the Reeds’ own bank accounts

to accounts held by Main Street Lofts and K Lofts.

Main Street Lofts generally accounted for transfers from the

Reeds’ personal accounts by increasing in its books the balance of an

account titled “Scott Reed Float Loan.” For 2014, all but one of

Mr. Reed’s transfers were accounted for in this way. The transfer not

accounted for in this way amounted to $7,000. In 2015, again, all but

one $600 transfer were accounted for in the same fashion.

K Lofts similarly accounted for transfers from the Reeds’ personal

accounts. K Lofts’ books included accounts titled “Scott Reed Short

Term Loan” and “Scott Reed Long Term Loan.” For 2014, K Lofts

tracked all but a $200,000 transfer as increases in the short-term loan

account. For 2015, K Lofts again tracked all but one of Mr. Reed’s

transfers either in the short-term loan account or in the long-term loan

account. The missing transfer totaled $11,000.

The record is unclear as to how K Lofts accounted for the $200,000

transfer in 2014. The general ledger prepared for K Lofts, which is

labeled Mulberry Flats in Exhibit 30-R (perhaps because it was printed

in 2018 after Deep Creek took over K Lofts and gave the complex a new

name), shows an increase of $200,000 in one of K Lofts’ cash accounts

on April 14, 2014. 5 But the entry does not refer to Mr. Reed. 6 It is

instead labeled “Endurance.” Other entries in this account bear the

4 Specifically, the parties agreed to information about the payments (as well as

the transfers to the projects we describe below) as set out in certain spreadsheets. The

parties have not stipulated the deductibility or characterization of the payments and

transfers.

5 On the same date, a bank statement for the Reeds shows a transaction labeled

“OR TLR transfer to CHK 0306.” For Mr. Reed’s other transfers to K Lofts, the Reeds’

bank statements show transactions with labels that begin “WIRE TYPE: BOOK OUT”

and that contain the name “K LOFTS.”

6 Other entries in K Lofts’ cash accounts, matching the dates and amounts of

Mr. Reed’s transfers, list “Scott Reed” in the “NAME” column of the general ledger.

[*8] same label and virtually all represent increases to the cash account

balance.

Under the double-entry accounting system developed during the

Renaissance, 7 each entry in a general ledger has two sides—a debit and

a credit. See Norwich Com. Grp., Inc. v. Commissioner, T.C. Memo.

2025-43, at *6 n.3. With respect to asset accounts, an account balance

is increased by debits and decreased by credits. The same is true with

respect to expense accounts.

The April 14, 2014, entry in the cash account is a debit, reflecting

the increase in the balance of that account. The corresponding credit for

the transaction appears in an expense account titled “Loss From

Property Damage.”

Thus, it would appear that K Lofts viewed the transaction as

reducing the loss it had incurred from the relevant incident. This

treatment appears to be consistent with an insured entity’s receiving a

payment from its insurance company as reimbursement for a covered

loss.

Treatment on the Reeds’ Returns

On their returns for the years at issue, the Reeds claimed

deductions for the payments and transfers discussed above.

With respect to the payments Mr. Reed made to third parties, the

Reeds claimed deductions on Schedules C, Profit or Loss From Business,

for Reed Realty Advisors in the following amounts: 8

7 Rainbow Tax Serv., Inc. v. Commissioner, 128 T.C. 42, 47 n.3 (2007)

(“Historians generally consider Luca Pacioli (1445–1514 or 1517) to be ‘The Father of

Accounting’ for first documenting in his work Summa de Arithmetica, Geometria,

Proportioni et Proportionalita (Venice 1494), the process of double entry

bookkeeping.”).

8 The deductions the Reeds claimed for Legal and Professional Services and

Repairs and Maintenance for 2012 and for Legal and Professional Services for 2014

exceed by a few thousand dollars each the amounts which the parties have stipulated.

The reasons for the differences between the claimed amounts and the stipulated

amounts are unclear.

[*9]

Year

Legal &

Professional

Services

Repairs &

Maintenance

Contract

Labor

2012

$48,260

$83,387

—

$131,647

2013

88,867

108,458

$149,655

346,980

2014

116,130

38,745

153,601

308,476

2015

76,730

14,818

—

91,548

Total

The Reeds treated the transfers from their personal bank

accounts to Main Street Lofts and K Lofts as deductible unreimbursed

partnership expenses.

The Reeds reported these amounts on

Schedules E, Supplemental Income and Loss, for the taxable years 2014

and 2015. Supplemental Business Expense Worksheets attached to the

Reeds’ returns reflect the following amounts claimed for each project: 9

IV.

Year

Main Street Lofts

K Lofts

Total

2014

$115,000

$371,796

$486,796

2015

220,525

133,250

353,775

The Reeds’ Other Activities

During the years at issue, the Reeds were involved in other

activities relevant to the questions before us. Mr. Reed started a second

business selling wood reclaimed from truck beds, the Reeds leased

farmland in Oregon, and the Reeds owned rental property in Arkansas.

Selling Reclaimed Wood

During his time in Arkansas, Mr. Reed learned from a colleague

that a nearby business gave away large quantities of used wood. The

business specialized in replacing the wooden decks of large trucks. It

gave away the worn wood that it had removed from the trucks.

9 The unreimbursed partnership expenses the Reeds claimed with respect to

Main Street Lofts for 2015 exceed by approximately $30,000 the amounts stipulated

by the parties. As in the case of the Reeds’ Schedule C expenses, the reasons for the

difference are unclear.

[*10] Mr. Reed collected that wood and then either sold it or used it as

flooring in his real estate projects. Mr. Reed sold wood to an entity

named Green Star in 2013, 2014, and 2015.

Green Star deposited the following amounts into bank accounts

held by the Reeds or Reed Realty Advisors: $10,186 in 2013, $32,981 in

2014, and $5,200 in 2015.

The Reeds’ 2013 and 2014 returns included Schedules C that

listed the business name “Reed Realty Advisors LLC” and the principal

business “Sale of Reclaimed Wood.” These Schedules C reflected gross

receipts of $4,920 and $26,102 for 2013 and 2014, respectively. The

Reeds did not file a Schedule C with respect to the reclaimed wood

business for 2015 and did not report any gross receipts from sales of

reclaimed wood on their return for 2015.

Farming

In the years at issue, the Reeds also developed an interest in

living on and operating a farm. So, in 2013, Mr. Reed approached an

Oregon landowner about leasing farmland.

At trial, Mr. Reed testified that the landowner was interested in

selling the property, rather than leasing it. Nonetheless, the Reeds and

the landowner ultimately agreed to a leasing arrangement. The terms

of this agreement are unclear: Although the Reeds offered a proposed

lease agreement into evidence, that agreement was not signed and, at

trial, Mr. Reed testified that he and the landowner had reached an oral

agreement that was not reduced to writing.

The Reeds took possession of the property and paid a total of

$50,000 to the landowner in quarterly installments. After they had

leased the property for one year, the Reeds purchased it.

On the Schedule F, Profit or Loss From Farming, attached to their

2013 tax return, the Reeds claimed a $50,000 rent expense.

Renting Property

In 2014, the Reeds owned rental property in Arkansas. A

company called Dixon Ventures managed the Reeds’ rental property.

For the taxable year 2014, Dixon Ventures issued to the Reeds a

Form 1099–MISC, Miscellaneous Income, reporting rental income of

[*11] $38,478. The Reeds reported rents received of just $28,653 on the

Schedule E attached to their 2014 return.

General Business Credit Claimed for 2012

In addition to the items already described, on their 2012 return,

the Reeds claimed a section 38 10 general business credit of $99,800 for

rehabilitating the K Lofts property. They claimed the credit on

Form 3800, General Business Credit, and specified the full amount as

an investment credit. On an attached Form 3468, Investment Credit,

the Reeds reported that the full $99,800 represented a rehabilitation

credit.

VI.

Tax Returns and Examination

The Reeds did not file their federal income tax returns for the

years at issue on time. The following table reflects the due dates for

each of the four relevant returns and the dates on which the Reeds filed

them:

Taxable Year

Return Due

Return Filed

2012

October 15, 2013

November 25, 2013

2013

April 15, 2014

January 2, 2015

2014

October 15, 2015

March 30, 2016

2015

October 15, 2016

December 16, 2016

The Commissioner examined the Reeds’ returns for the years at

issue. For the 2012, 2013, and 2014 taxable years, the Commissioner

conducted a bank deposit analysis during the examination. He

subsequently issued to the Reeds a Notice of Deficiency, determining

deficiencies for each of the years at issue as well as additions to tax

under section 6651 and penalties under section 6662.

The Reeds timely petitioned this Court for redetermination.

10 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, regulation

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all

relevant times, and Rule references are to the Tax Court Rules of Practice and

Procedure. All monetary amounts have been rounded to the nearest dollar.

[*12] VII.

Trial

We held a four-day trial in Little Rock, Arkansas. During trial,

Mr. Reed testified regarding the various activities at issue in this case.

Other witnesses offered testimony regarding the real estate

development projects at the heart of the case. At the conclusion of trial,

we left the record open to allow the parties to file a Supplemental

Stipulation of Facts.

OPINION

Burdens of Proof and Production

The Commissioner’s determinations in a Notice of Deficiency are

generally presumed correct, and the taxpayer bears the burden of

proving those determinations erroneous. See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933); Merkel v. Commissioner, 192 F.3d

844, 852 (9th Cir. 1999), aff’g 109 T.C. 463 (1997). 11

In cases involving unreported income in the U.S. Court of Appeals

for the Ninth Circuit, to which an appeal in this case would ordinarily

lie, see I.R.C. § 7482(b)(1)(A), the general rule is subject to the following

conditions:

For the presumption to apply . . . the Commissioner must

base the deficiency on some substantive evidence that the

taxpayer received unreported income. If the Commissioner

introduces some evidence that the taxpayer received

unreported income, the burden shifts to the taxpayer to

show by a preponderance of the evidence that the

deficiency was arbitrary or erroneous. If the [taxpayer]

succeeds in showing that the deficiency was arbitrary or

erroneous, the burden shifts back to the Commissioner to

show that the [determination] was correct.

Hardy v. Commissioner, 181 F.3d 1002, 1004–05 (9th Cir. 1999)

(citations omitted), aff’g T.C. Memo. 1997-97; see also Walquist v.

Commissioner, 152 T.C. 61, 67–68 (2019) (collecting authorities);

11 If the taxpayer puts forth credible evidence with respect to any factual issue

relevant to ascertaining the taxpayer’s liability and meets certain other requirements,

the burden of proof shifts to the Commissioner as to that issue. I.R.C. § 7491(a)(1)

and (2). The Reeds have not argued that section 7491(a) requires the burden to shift

for any of the issues before us. Nor does the record support such a conclusion.

[*13] Caldwell v. Commissioner, T.C. Memo. 2022-51, at *5 (“In cases of

unreported income, the Commissioner must establish an evidentiary

foundation connecting the taxpayer to the income-producing activity,

Weimerskirch v. Commissioner, 596 F.2d 358, 361 (9th Cir. 1979), rev’g

67 T.C. 672 (1977), or demonstrate that the taxpayer actually received

income, Edwards v. Commissioner, 680 F.2d 1268, 1270–71 (9th Cir.

1982).”).

This case also involves determinations regarding claimed

deductions. The taxpayer bears the burden of proving entitlement to

any deduction claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

84 (1992). Thus, a taxpayer claiming a deduction on a federal income

tax return must demonstrate that the Code authorizes the deduction

and must maintain records sufficient to enable the Commissioner to

determine the correct tax liability. See I.R.C. § 6001; Hradesky v.

Commissioner, 65 T.C. 87, 89–90 (1975), aff’d per curiam, 540 F.2d 821

(5th Cir. 1976); Treas. Reg. § 1.6001-1(a).

Under section 7491(c), the Commissioner bears the burden of

production with respect to the liability of any individual for any addition

to tax or penalty. Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

Once the Commissioner has met his burden of production, the taxpayer

bears the burden of proof and “must come forward with evidence

sufficient to persuade [the] Court that the Commissioner’s

determination is incorrect.” Id. at 447.

We turn first to the Commissioner’s income adjustments.

II.

Ordinary Income Items

The Commissioner determined that the Reeds underreported

ordinary income from multiple sources during the years at issue. After

concessions, four remain at issue: (1) gross receipts from Reed Realty

Advisors’ real estate business for 2012, 2013, and 2014; (2) gross receipts

from Reed Realty Advisors’ wood-selling business for 2014 and 2015;

(3) taxable interest reported by TJ Tower on Schedule K–1 for 2015; and

(4) rents reported by Dixon Ventures on Form 1099–MISC for 2014. The

following table summarizes the remaining ordinary income issues:

[*14]

Year

Increase Determined

by the Commissioner

2012

$18,888

2013

14,395

2014

60,486

2014

6,806

2015

5,200

Rents Reported by Dixon Ventures

2014

9,825

Taxable Interest Reported by TJ Tower 12

2015

21,146

Source

Real Estate Business Gross Receipts

Wood-Selling Business Gross Receipts

Gross Receipts from Reed Realty Advisors’ Real Estate

Business

We begin by examining whether the Commissioner has provided

“some substantive evidence” to connect the Reeds with the gross receipts

he determined. See Hardy v. Commissioner, 181 F.3d at 1004;

Weimerskirch v. Commissioner, 596 F.2d at 361; Walquist, 152 T.C. at

67–68. We conclude that he has.

The Commissioner’s determination that the Reeds underreported

gross receipts from Reed Realty Advisors’ real estate business is

supported by the bank deposit analyses conducted during the

examinations for 2012, 2013, and 2014. We have long accepted bank

deposit analyses to establish the evidentiary foundation required from

the Commissioner. See Clayton v. Commissioner, 102 T.C. 632, 645–46

(1994); Alioto v. Commissioner, T.C. Memo. 2025-125, at *7; see also

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) (“A bank deposit is

prima facie evidence of income and [the Commissioner] need not prove

a likely source of that income.”). The bank deposits method assumes

that all money deposited into a taxpayer’s bank account during a given

period constitutes taxable income, but the Commissioner must take into

account any nontaxable source or deductible expense of which he has

knowledge. See Clayton, 102 T.C. at 645–46; DiLeo v. Commissioner, 96

T.C. 858, 868 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992).

The Reeds argue that the Commissioner’s bank deposit analyses

do not distinguish between taxable and nontaxable deposits and are

therefore insufficient. Even a cursory review of the analyses, however,

12 Initially, a dispute existed concerning unreported taxable interest income for

2012, 2013, and 2014, as well. But the Reeds conceded those amounts at trial.

[*15] shows the claim is baseless. The Commissioner’s analyses

specifically distinguished between “Non-Taxable Deposits,” “Taxable

Deposits,” and “Transfers” among the accounts reviewed for each of the

three years analyzed. We therefore conclude that the bank deposit

analyses performed for the Reeds’ 2012, 2013, and 2014 taxable years

satisfy the Commissioner’s burden with respect to the additional gross

receipts identified for those years.

We next consider whether the Reeds have met their burden to

prove, by a preponderance of the evidence, that the Commissioner’s

determinations are arbitrary or erroneous. See Hardy v. Commissioner,

181 F.3d at 1004–05; Walquist, 152 T.C. at 67–68.

The Reeds dispute the treatment of a $40,000 transfer from

Connie DeMerell, a friend of Dr. Reed. At trial, Mr. Reed credibly

testified that in 2014 he had agreed to help Ms. DeMerell purchase a

building in Baton Rouge, Louisiana.

According to Mr. Reed,

Ms. DeMerell transferred $40,000 to him as an advance for expenses

that Mr. Reed would incur while performing due diligence ahead of the

purchase. Mr. Reed also testified that, in addition to excluding the

$40,000 transfer from income, he did not deduct any expenses covered

by the $40,000.

The Commissioner has not rebutted Mr. Reed’s testimony and on

brief suggests only that, if we conclude the $40,000 is not income to the

Reeds, then we must reduce the Reeds’ Schedule C expenses by $40,000.

We conclude that the $40,000 transfer from Ms. DeMerell was an

advance and thus should not be included in the Reeds’ income. Further,

the record does not reflect that the Reeds attempted to deduct any of the

expenses related to the transfer; therefore, we will not take up the

Commissioner’s suggestion to reduce the Reeds’ Schedule C expenses.

With respect to the remaining determinations relating to the

gross receipts from Reed Realty Advisors’ real estate business, the Reeds

argue that “Mr. Reed’s testimony, the stipulated facts, and documentary

evidence all support the conclusion that no additional taxable gross

receipts were received.” Pet’r’s Op. Br. 52. We disagree. The Reeds

have failed to establish that any of the other deposits the Commissioner

classified as unreported income were not taxable. Nor have the Reeds

established that they reported any of the deposits.

In sum, the record supports treating as additional income to the

Reeds the deposits the Commissioner identified as gross receipts from

[*16] Reed Realty Advisors’ real estate business, less the $40,000

advance from Ms. DeMerell.

Gross Receipts from the Wood-Selling Business

We turn next to the Commissioner’s determination that the Reeds

had unreported gross receipts from Reed Realty Advisors’ wood-selling

business for 2014 and 2015.

The Commissioner has established the required minimal

evidentiary foundation with respect to these gross receipts. For 2014

and 2015, the parties have stipulated that there were bank deposits

totaling at least $32,981 and $5,200, respectively, relating to reclaimed

wood sales. And, with respect to 2014, the parties’ stipulation is further

supported by the Commissioner’s bank deposit analysis. The parties’

stipulations as to the bank deposits satisfy the Commissioner’s burden

of production with respect to the gross receipts from reclaimed wood

sales. See Tokarski, 87 T.C. at 77.

For their part, the Reeds argue that the amounts they reported

as gross receipts from selling reclaimed wood during the years at issue

are consistent with amounts reported by Green Star on Forms 1099.

Neither party introduced into evidence the Forms 1099, and they are

not in the record. Regardless, even if Green Star did not report its

payments to Reed Realty Advisors on Form 1099, such a failure to report

would not cause the payments to be excluded from the Reeds’ income.

See I.R.C. § 61; see also Reyes Barrios v. Commissioner, T.C. Memo.

2026-32, at *4 (“The failure to receive tax information forms . . . does not

excuse a taxpayer from his obligation to report income.”); Brunsman v.

Commissioner, T.C. Memo. 2003-291, 2003 WL 22351607, at *1 (treating

a taxpayer’s compensation for services as income even though the

taxpayer had not received a Form 1099–MISC from his employer). We

will therefore sustain the Commissioner’s determination that the Reeds

underreported gross receipts from Reed Realty Advisors’ wood-selling

business. 13

13 With respect to the 2014 taxable year, the Commissioner determined that

the Reeds had not reported $6,806 of gross receipts from Reed Realty Advisors’ woodselling business. The parties have stipulated that, for 2014, actual deposits from

reclaimed wood sales were $32,981. But the Reeds reported only $26,102 from such

sales for that year, leaving a shortfall of $6,879 ($32,981 − $26,102 = $6,879). Because

the Commissioner does not seek an increased deficiency with respect to the 2014

taxable year, we sustain only the increase determined in the Notice of Deficiency.

[*17] C.

Rental Income Reported by Dixon Ventures

The Commissioner’s determination that the Reeds had

unreported rental income for 2014 is supported by the Form 1099–MISC

issued by Dixon Ventures. That Form 1099 suffices to establish the

minimal evidentiary foundation required of the Commissioner. See

Hardy v. Commissioner, 181 F.3d at 1004–05; Walquist, 152 T.C. at 68.

The Reeds did not address the 2014 rental income issue in

posttrial briefing. They have therefore abandoned the issue. See, e.g.,

Mendes v. Commissioner, 121 T.C. 308, 312–13 (2003) (reviewed) (“If an

argument is not pursued on brief, we may conclude that it has been

abandoned.”); Nicklaus v. Commissioner, 117 T.C. 117, 120 n.4 (2001)

(concluding that taxpayers who failed to raise on brief arguments they

had made previously had abandoned those arguments); see also, e.g.,

Miller v. Fairchild Indus., Inc., 797 F.2d 727, 738 (9th Cir. 1986) (“[We]

will not ordinarily consider matters on appeal that are not specifically

and distinctly argued in appellant’s opening brief . . . .”). And, because

we conclude that the Commissioner has met his burden of production

with respect to the rental income, we will sustain the Commissioner’s

determination that the Reeds had unreported rents in 2014.

Taxable Interest Reported by TJ Tower

The Commissioner’s determination that the Reeds underreported

taxable interest from TJ Tower is supported by the Schedule K–1 for the

taxable year 2015 that TJ Tower issued to Mr. Reed’s disregarded entity.

The 2015 Schedule K–1 reported $21,065 in taxable interest income.

The Reeds have not disputed the accuracy of the Schedule K–1, see I.R.C.

§ 6201(d), and it satisfies the Commissioner’s burden of production with

respect to the amount reported there, see Hardy v. Commissioner, 181

F.3d at 1004–05; Walquist, 152 T.C. at 68.

The amount reported on the Schedule K–1, however, is $81 less

than the amount ($21,146) by which the Commissioner determined the

Reeds’ 2015 income should be adjusted to account for taxable interest.

The Commissioner has not established the minimal evidentiary

foundation required with respect to the unsupported $81.

The Reeds argue that, unless they actually or constructively

received the interest TJ Tower reported, it cannot constitute their

income. In the Reeds’ view, because they did not personally receive the

interest income, it is not taxable to them. They are mistaken.

[*18] A partner’s gross income includes his distributive share of

partnership gross income. I.R.C. §§ 61(a)(13), 702; see also I.R.C. § 704

(providing rules for determining a partner’s distributive share of tax

items). “[P]artners are taxable on their distributive or proportionate

shares of current partnership income irrespective of whether that

income is actually distributed to them.” United States v. Basye, 410 U.S.

441, 447–48 (1973); see also Vecchio v. Commissioner, 103 T.C. 170, 185

(1994).

Here, TJ Tower determined that the Reeds should have included

interest income of $21,065 as their distributive share of TJ Tower’s

interest income. 14 Absent any indication that TJ Tower did not receive

interest income in 2015, or that the Reeds’ distributive share of such

income was not the amount reported, the amount reported by TJ Tower

was income to the Reeds without regard to whether they received a

distribution of that amount. See Basye, 410 U.S. at 447–48; Vecchio, 103

T.C. at 185.

III.

Capital Gain or Loss from Sales of Partnership Interests

We turn next to the Commissioner’s determination that the Reeds

had unreported net capital gain in 2013 from Mr. Reed’s sales of units

of Main Street Lofts and K Lofts.

In the Notice of Deficiency, the Commissioner determined that for

2013 the Reeds underreported net capital gain by $92,190, composed of

a $108,526 net long-term capital gain and a $16,336 net short-term

capital loss. According to the Notice, the net long-term capital gain

resulted from Mr. Reed’s sales of member units (that is, portions of his

partnership interest) of K Lofts, while the net short-term capital loss

arose from his sales of member units of Main Street Lofts. 15 The Reeds

do not contest that they experienced a loss when Mr. Reed sold units of

Main Street Lofts, but they do challenge the gain from Mr. Reed’s sales

of K Lofts units.

14 That the Reeds owned their interest in TJ Tower through one or more

disregarded entities does not affect the analysis. Activities of a disregarded entity “are

treated in the same manner as a sole proprietorship, branch, or division of the owner.”

Treas. Reg. § 301.7701-2(a). Thus, TJ Tower’s report of interest income for Reed

Property Group 5, LLC, is treated as a report that the Reeds themselves had interest

income for 2015.

15 Recall that, in 2013, Mr. Reed sold 13 units of K Lofts for a total of $221,000

and 2 units of Main Street Lofts for a total of $70,000.

[*19] The Reeds argue that Mr. Reed had substantial basis in his K

Lofts units when they were sold, and thus that he realized a loss of

approximately $125,000. In his Opening Brief, the Commissioner raises

a new argument: that Mr. Reed realized $196,950 of short-term capital

gain on the K Lofts unit sales. 16

Section 741 generally governs the treatment of a sale or exchange

of a partnership interest. See Pollack v. Commissioner, 69 T.C. 142, 144

(1977) (reviewed). The transferor partner recognizes gain or loss on the

sale of his partnership interest. I.R.C. § 741. And that gain or loss is

characterized, absent any application of section 751, 17 as gain or loss

from the sale or exchange of a capital asset. I.R.C. § 741.

We measure capital gain or loss from the sale of a partnership

interest “by the difference between the amount realized and the

adjusted basis of the partnership interest, as determined under

section 705.” Treas. Reg. § 1.741-1(a); cf. I.R.C. § 1001(a) (providing a

similar rule for sales of property generally).

The amount realized from the sale of a partnership interest

includes, among other things, the amount of money paid for the interest.

It also includes any reduction in the transferor partner’s share of

partnership liabilities. Treas. Reg. § 1.752-1(h); see also Treas. Reg.

§ 1.741-1(d) (pointing to rules that address the treatment of liabilities

on the sale or exchange of interests in a partnership); Treas. Reg.

§ 1.1001-2(a)(1) (providing, for sales of property generally, that “the

16 The Commissioner did not raise the increased amount of gain, or the shortterm character of the asserted gain, at any time before trial. This Court has “refused

to consider new theories raised by [the Commissioner] for the first time in his brief

where our consideration of such theories would prejudice the taxpayer.” Sundstrand

Corp. & Subs. v. Commissioner, 96 T.C. 226, 347 (1991). But this rule is not absolute.

See Ware v. Commissioner, 92 T.C. 1267, 1268 (1989), aff’d, 906 F.2d 62 (2d Cir. 1990).

Here, the Reeds have not complained that they were prejudiced by the Commissioner’s

new theory. And because the Reeds argue that they suffered a loss, they presented

testimony and evidence at trial relevant to their adjusted basis in the units even

without knowing the Commissioner’s ultimate position. Thus, we will consider the

Commissioner’s theory. But, because the increase in the Reeds’ gain and the shortterm characterization of that gain would increase the Reeds’ deficiency, the

Commissioner bears the burden of proof with respect to those issues. See Rule 142(a);

see also Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 237–38 (2018)

(reviewed).

17 Neither party has argued that section 751 applies to Mr. Reed’s sales of his

K Lofts units. Nor, by its terms, does section 751 appear to be relevant.

[*20] amount realized . . . [i]ncludes the amount of liabilities from which

the transferor is discharged as a result of the sale or disposition”).

With respect to adjusted basis, section 705 provides that the

adjusted basis of a partner’s interest is the basis determined under

section 722 or section 742, increased or decreased by certain amounts.

I.R.C. § 705(a); Continental Grand Ltd. P’ship v. Commissioner, No. 85922, 166 T.C., slip op. at 9 (Mar. 2, 2026). An increase in a partner’s share

of partnership liabilities is treated as a contribution of money by the

partner to the partnership and, therefore, increases the partner’s basis.

See I.R.C. §§ 722, 752(a). And we determine a transferor partner’s

adjusted basis as of the date of the sale or exchange. Treas. Reg. § 1.7051(a)(1).

The parties agree on the timing of the sales of Mr. Reed’s units

(reflected in the table on page 6 above) and the amount paid for each

unit ($17,000 per unit). Thus, only the adjusted basis in the units

remains to be determined.

The Reeds contend that Mr. Reed’s basis in each unit of K Lofts

was approximately $25,000. At trial, Mr. Reed referred to “the K–1 from

K Lofts,” testifying that his capital account was approximately $425,000

and his share of partnership liabilities was approximately $700,000 on

the Schedule K–1. He further testified that his cumulative basis, across

45 units, was approximately $1.2 million, yielding approximately

$25,000 of basis per unit. 18

But the record contradicts Mr. Reed’s testimony as to his adjusted

basis in the K Lofts units. The 2013 Schedule K–1 issued by K Lofts for

Mr. Reed’s disregarded entity (K Lofts Member One, LLC) reflects

capital contributions totaling $533,016, a distribution or withdrawal of

$99,696, and a distributive share of partnership liabilities of $298,791

during the year. 19 The Schedule K–1 reflects an ending capital account

for Mr. Reed of $425,020 and that Mr. Reed’s share of partnership

liabilities was $298,791. Assuming that both of those values were

reflected in Mr. Reed’s basis in K Lofts, Mr. Reed’s basis in each unit

18 Total basis of $1.2 million would yield a per-unit basis of $26,667, rather

than $25,000 ($1.2 million ÷ 45 units = $26,667). Using the $425,000 and $700,000

amounts that Mr. Reed suggests, however, the per-unit basis would be exactly $25,000.

$425,000 + $700,000 = $1,125,000. And $1,125,000 ÷ 45 = $25,000.

19 For convenience, we will refer to these amounts as attributable to Mr. Reed

directly and will not refer to K Lofts Member One, LLC’s involvement further.

[*21] would have been only $16,085. 20 At that basis per unit and a perunit sale price of $17,000, Mr. Reed would have recognized gain on the

sales of his units, rather than a loss.

Moreover, the 2013 Schedule K–1 from K Lofts does not reflect

the order in which the relevant contributions, distributions, and

incurring of liabilities took place during 2013. 21 Mr. Reed sold all of the

units at issue before or during April 2013. The record does not reflect

when Mr. Reed made his contributions to K Lofts—for example, if they

were all made on January 1, 2013, or if they were made sporadically

throughout the year. Nor does the record reflect when Mr. Reed received

the $99,696 distribution from K Lofts. Without more, it is not possible

to determine Mr. Reed’s basis at the time of each sale, rather than at

the end of the calendar year. Cf. Treas. Reg. § 1.705-1(a)(1).

This problem is especially pronounced with respect to Mr. Reed’s

share of K Lofts’ liabilities, because other evidence in the record

suggests that K Lofts incurred new liabilities after April 2013. A

“Consent Memorandum of the Members and Managers of K Lofts, LLC,”

dated May 31, 2013, authorized K Lofts to borrow $1.375 million from

IBERIABANK. If part or all of Mr. Reed’s distributive share of K Lofts’

liabilities arose after April 2013, it could not have increased Mr. Reed’s

basis at the time that he sold his K Lofts units.

Even if Mr. Reed’s adjusted basis was increased by his share of

K Lofts’ liabilities before he sold his units, it is unclear whether the

$17,000 “gross sale” of each unit, which the parties have stipulated,

includes any reduction in Mr. Reed’s distributive share of liabilities on

account of the sale, as required by section 752. That is, the assertion

that Mr. Reed’s basis included his distributive share of liabilities calls

into question the correct amount realized on his sales of K Lofts units.

The uncertainty in the record as to when and how Mr. Reed’s

basis in his K Lofts units increased or decreased leaves us unable to

determine that Mr. Reed’s adjusted basis as of the dates of his sales is

greater than the amount the Commissioner allowed in the Notice of

20 $425,020 + $298,791 = $723,811.

$723,811 ÷ 45 = $16,085.

21 This is not the only problem with relying on the 2013 Schedule K–1. Because

the 2013 Schedule K–1 was created after the end of the taxable year 2013, it reports

that Mr. Reed owned only 31% of K Lofts. Mr. Reed’s distributive shares of partnership

income or loss and liabilities reported on the Schedule K–1 would have been based, at

least in part, on calculations involving his reduced ownership share. At the times of

the sales, however, Mr. Reed owned as much as 45% of K Lofts.

[*22] Deficiency. In other words, the Reeds have not met their burden

to establish error on this issue. 22 See Treas. Reg. § 1.705-1(a)(1).

In support of the increased capital gain amount presented in his

Opening Brief, the Commissioner claims that Mr. Reed had a

cumulative adjusted basis of $24,050 at the time of his sales. The

Commissioner arrived at that number by adding up the cash deposit

entries in the equity account for Mr. Reed in K Lofts’ books and records

during January 2013.

The Commissioner’s method for determining Mr. Reed’s basis

ignores the possibility that Mr. Reed had some adjusted basis before

making additional contributions during 2013. Without providing any

evidence as to Mr. Reed’s basis at the beginning of 2013, the

Commissioner has not met his burden with respect to the proposed

increased deficiency amount.

Nor has the Commissioner met his burden with respect to the

character of Mr. Reed’s gain. The Commissioner claims that K Lofts was

formed on January 1, 2013, and that Mr. Reed could not have held his

units in K Lofts for more than one year as a result. This analysis

appears to be mistaken. Although the record does not reflect the precise

date on which K Lofts was formed, it appears that K Lofts existed—and

acquired property—as early as 2010. Without establishing when

Mr. Reed acquired his units in K Lofts, the Commissioner has not met

his burden to establish that Mr. Reed’s gain should be characterized as

short-term capital gain.

In view of the foregoing, we sustain the Commissioner’s

determination as to the $108,526 net long-term capital gain reflected in

the Notice of Deficiency, but do not agree with the increased gain or the

short-term character reflected in the Commissioner’s Opening Brief.

Having concluded our analysis of the income adjustments, we

turn next to the Commissioner’s determinations concerning deductions.

22 This Court has at times applied the Cohan rule to estimate a taxpayer’s

adjusted basis when feasible. See Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d

Cir. 1930). Here, the evidence is insufficient to establish that Mr. Reed’s basis at the

relevant times was greater than what the Commissioner allowed, and a Cohan

estimate is therefore not appropriate. Cf. Coloman v. Commissioner, 540 F.2d 427,

431–32 (9th Cir. 1976) (“In the instant case, to allow the Cohan doctrine to be invoked

by the taxpayers would be in essence to condone the use of that doctrine as a substitute

for the burden of proof.”), aff’g T.C. Memo. 1974-78.

[*23] IV.

Items of Deduction

Third-Party Expenses Claimed with Respect to Reed Realty

Advisors

On the Schedules C attached to their returns for the years at

issue, the Reeds claimed substantial deductions for payments to third

parties. The Reeds contend these payments relate to Reed Realty

Advisors. During trial, the parties stipulated the timing and amounts

of the payments claimed as expenses, so all that remains for decision is

whether they are deductible.

On brief, the Reeds argue that they have adequately

substantiated these expenses and that the Commissioner has not

provided specific evidence to contradict their claims. 23

The

Commissioner contends that the Reeds’ claimed expenses were truly

expenses of the project entities and that the Reeds may not deduct them.

Additionally, the Commissioner asserts that the Reeds were entitled to

reimbursement for the expenses that Reed Realty Advisors paid,

defeating the Reeds’ deduction claims.

Section 162(a) allows a taxpayer to deduct all ordinary and

necessary expenses paid or incurred in carrying on a trade or business.

See INDOPCO, Inc. v. Commissioner, 503 U.S. at 85 (describing the

requirements of section 162(a)). A trade or business expense is ordinary

if it is normal or customary within a particular trade, business, or

industry. Deputy v. du Pont, 308 U.S. 488, 495 (1940); Welch v.

Helvering, 290 U.S. at 113–14. A trade or business expense is necessary

if it is appropriate and helpful for the development of the taxpayer’s

23 With respect to this issue and others, the Reeds’ briefs appear to reflect a

misunderstanding of the burden of proof principles discussed in Opinion Part I above.

The Reeds bear the burden of proof with respect to their claimed deductions. See

INDOPCO, Inc. v. Commissioner, 503 U.S. at 84.

This is not the only difficulty we have encountered with the Reeds’ briefs.

Their Simultaneous Opening Brief repeatedly cites pages in the record and transcript

that do not support the propositions for which they are cited as well as exhibits that

were not introduced into evidence. Some issues are not addressed at all, even though

the Reeds and the Commissioner do not appear to have agreed on their resolution. As

the Supreme Court reminds us, “judges are not like pigs, hunting for truffles buried in

the record.” Murthy v. Missouri, 144 S. Ct. 1972, 1991 n.7 (2024) (quoting Gross v.

Town of Cicero, 619 F.3d 697, 702 (7th Cir. 2010)) (cleaned up). When the Reeds’ briefs

fail to identify support for their assertions, and when they fail to address issues that

remain in dispute, it is not the Court’s obligation to “scour the record in an attempt to

formulate a cogent argument” on the Reeds’ behalf. Jeffers v. Commissioner, 992 F.3d

649, 653 (7th Cir. 2021).

[*24] business. Commissioner v. Heininger, 320 U.S. 467, 471 (1943);

Welch v. Helvering, 290 U.S. at 113. To be deductible, ordinary and

necessary expenses must be “directly connected with or pertaining to the

taxpayer’s trade or business.” Treas. Reg. § 1.162-1(a); see also Cooper

v. Commissioner, 143 T.C. 194, 213 (2014), aff’d, 877 F.3d 1086 (9th Cir.

2017).

Our analysis of the Reeds’ claimed deductions turns in large part

on the nature of the underlying expenses. Based on the Exhibits

admitted into evidence and the testimony at trial, we have broken the

stipulated payments into three categories, set out in Appendixes A, B,

and C. 24

Payments to Advisors and Consultants (Appendix A)

The record here, including the testimony at trial, persuades us

that the Reeds are entitled to deduct the expenses set out in Appendix A,

see infra pp. 41–45, as trade or business expenses of Reed Realty

Advisors. These expenses include payments to advisors and consultants

hired by Reed Realty Advisors, including land use consultants, law

firms, and the businesses of David Robinson and Alex Dzyuba. 25 At

trial, Mr. Reed credibly testified as to the nature of these expenses and

their relationship to Reed Realty Advisors’ activities. We are persuaded

that these expenses are ordinary and necessary to Reed Realty Advisors’

real estate business.

With respect to these expenses, the record does not support the

Commissioner’s argument that Reed Realty Advisors was entitled to

reimbursement from the project entities.

For example, the

Commissioner has not shown that the books and records of the project

entities that have been provided reflect these payments by Reed Realty

Advisors as loans by Mr. Reed or as expenses reimbursable to him.

We therefore conclude that the expenses in Appendix A are

deductible under section 162(a).

24 The total amounts set out in the Appendixes are based on the testimony and

record in this case, but differ from the total amounts the parties claim to be in dispute.

Expenses claimed by the Reeds, but not described in the Appendixes, have not been

substantiated by the Reeds and are not deductible under section 162(a) or otherwise.

25 Appendix A also includes a few payments to credit monitoring agencies, a

professional certification group, and the Oregon secretary of state. These expenses

also are ordinary and necessary to Reed Realty Advisors.

[*25]

Payments with Respect to Reed Dermatology

Northwest and Unexplained Payments (Appendix B)

We are not persuaded, however, that the expenses set out in

Appendix B, see infra pp. 46–47, are ordinary and necessary expenses of

Reed Realty Advisors’ business. Appendix B includes expenses paid

with respect to Reed Dermatology Northwest—Dr. Reed’s medical

practice—and other miscellaneous expenses.

As to the Reeds’ payments with respect to Reed Dermatology

Northwest, the Reeds have not established that such payments were

connected with Reed Realty Advisors’ business. At trial, Mr. Reed

testified that the expenses were

start-up labor costs for my wife’s dermatology practice that

she would be opening up. So this is all of the expenses

related. The biggest expense is related to the consultant

that set up all of our contracts with the health insurers, got

us admitted into the Quality Medical Group, got our

hospital privileges, and did all of sort of the frontend setup

for what would become Reed Dermatology Northwest.

Tr. 519. The Reeds have not argued, nor have they demonstrated, that

Reed Realty Advisors was in the trade or business of operating a medical

practice. Instead, the Reeds assert that Reed Realty Advisors was in

the business of real estate consulting and development, a business to

which these payments have no clear tie.

To the extent the Reeds intended to argue that their payments

arose in connection with a trade or business separate from Reed Realty

Advisors, they have not met their burden of proof to show that they are

deductible for the year claimed. Although Dr. Reed did eventually open

her own medical practice, the Reeds have not established when that

practice began to operate or that it operated through an entity for which

the Reeds could claim deductions on their own returns. See generally

Root v. Commissioner, T.C. Memo. 2025-51, at *9–11 (discussing the

legal standards applicable to determining whether a taxpayer is

engaged in a trade or business, including the requirement that the

taxpayer’s business activities actually have commenced).

Appendix B also includes payments the purposes of which are

unclear. Some of these payments were not addressed at all during trial

and are not explained by the record more broadly. As a result, we are

unable to conclude that these payments represent ordinary and

[*26] necessary expenses of Reed Realty Advisors. For other payments

in this group, Mr. Reed testified that he had a detailed set of

spreadsheets that would provide substantiation. After trial, we left the

record open so that the parties could submit those spreadsheets, but the

documents submitted by the parties after trial do not shed light on the

purposes of the payments. We therefore conclude that the Reeds have

not met their burden of proof with respect to these payments.

Payments

for

Repairs,

Construction,

Landscaping at the Projects (Appendix C)

and

The analysis is more complicated with respect to the expenses set

out in Appendix C. See infra pp. 48–50. These expenses reflect

payments to contractors for repairs, other construction work, and

landscaping performed at the Main Street Lofts, K Lofts, and other real

estate projects in which Reed Realty Advisors was involved.

One might view such expenses as belonging either to Reed Realty

Advisors or to the relevant project entities depending on the agreements

between those businesses and the general structure of their working

relationship. Here, the Reeds have not demonstrated that the expenses

belonged to Reed Realty Advisors. We have received no evidence that

Reed Realty Advisors was committed to incurring these types of costs in

connection with the Main Street Lofts, K Lofts, or other projects.

That these expenses belonged to the project entities is confirmed

by the parties’ stipulation that, for each historic real estate development

project in which Reed Realty Advisors was involved, “[t]he costs of the

acquisition, contractors, and construction were to be borne by the

respective LLC.” First Stip. of Facts, para. 19.

A taxpayer generally may not deduct the payment of another

person’s expenses. See du Pont, 308 U.S. at 494–95; Welch v. Helvering,

290 U.S. at 114; Betson v. Commissioner, 802 F.2d 365, 368 (9th Cir.

1986), aff’g in part, rev’g in part T.C. Memo. 1984-264; Dietrick v.

Commissioner, 881 F.2d 336, 338 (6th Cir. 1989), aff’g T.C. Memo. 1988180; Lohrke v. Commissioner, 48 T.C. 679, 684 (1967); Eskimo Pie Corp.

v. Commissioner, 4 T.C. 669, 677 (1945), aff’d per curiam, 153 F.2d 301

(3d Cir. 1946). Under this general rule, absent an exception, Reed

Realty Advisors would not be entitled to deduct the expenses it paid on

behalf of the project entities.

The Reeds suggest that they are entitled to an exception under a

line of authorities stemming from Lohrke. This line of authorities comes

[*27] with conditions: We have recognized a narrow exception to the

general rule where (1) the taxpayer’s primary motive for paying the

other’s obligation is to protect or promote the taxpayer’s own business

and (2) the expenditure is an ordinary and necessary expense of the

taxpayer’s business. Lohrke, 48 T.C. at 688; see also Cooper, 143 T.C.

at 214; Plano Holding LLC v. Commissioner, T.C. Memo. 2019-140,

at *8–9. 26

The Reeds’ argument falls short at the first Lohrke prong.

Generally, the first prong requires that a taxpayer pay “the other

person’s expense primarily to benefit its business, with the receipt by

the other person of any benefit from the payment being merely

incidental.” HIE Holdings, Inc. v. Commissioner, T.C. Memo. 2009-130,

2009 WL 1586044, at *95, aff’d, 521 F. App’x 602 (9th Cir. 2013). To

establish that it acted primarily to benefit its own business, the taxpayer

must “demonstrate a direct nexus between the purpose of the payment

and the taxpayer’s business or income-producing activities.” Bone v.

Commissioner, T.C. Memo. 2001-43, 2001 WL 180170, at *4 (citing Lettie

Pate Whitehead Found., Inc. v. United States, 606 F.2d 534, 538 (5th Cir.

1979)), aff’d, 324 F.3d 1289 (11th Cir. 2003).

“The potential harm for which a business is protected through the

payment of the other person’s expense must be direct and proximate.”

HIE Holdings, Inc. v. Commissioner, 2009 WL 1586044, at *96; see also

Square D Co. & Subs. v. Commissioner, 121 T.C. 168, 200 (2003); Hood

v. Commissioner, 115 T.C. 172, 181 (2000). Typically, when the

exception applies, the taxpayer has paid expenses on behalf of another

who was unable to make payment. See Square D Co., 121 T.C. at 200

(collecting authorities); Hood, 115 T.C. at 180–81 (same).

26 As then-Judge Kennedy observed in a similar context:

If [a taxpayer] paid corporate expenses in the ordinary and necessary

course of some trade or business of his own, a deduction would be

permitted. See, e.g., Madden v. Commissioner, 40 T.C.M. (CCH) 1103,

1111 (1980); Lohrke, 48 T.C. at 688–89; cf. O’Neill v. Commissioner,

271 F.2d 44, 48 (9th Cir. 1959) (considering loss deduction). Payments

made, however, with the purpose of keeping in business a corporation

in which the taxpayer holds an interest are not deductible. Madden,

40 T.C.M. at 1111. Cf. Dodd v. Commissioner, 298 F.2d 570, 576–77

(4th Cir. 1962) (deduction disallowed where expenses of corporation

are only “incidentally related” to taxpayer’s own trade or business).

Betson v. Commissioner, 802 F.2d at 368 (cleaned up).

[*28] We are not persuaded that Reed Realty Advisors paid the project

entities’ repair and construction expenses primarily for its own benefit.

On brief, the Reeds have shed little light on the purpose of Reed Realty

Advisors’ payments. At trial, Mr. Reed testified that his primary goal

at Reed Realty Advisors was to obtain a development fee, an amount

paid to Reed Realty Advisors at the end of a given project. Tr. 384

(“[T]he main reason why I do these developments is for the development

fee.”). But several points cut against the conclusion that there was a

direct nexus between the purpose of Reed Realty Advisors’ payments

and earning a development fee.

First, the Reeds have not demonstrated that the real estate

projects were unable to pay their own expenses in 2012 or 2013, or that

the projects would have faced difficulty in doing so. Thus, it is unclear

how Reed Realty Advisors’ payment of the projects’ expenses in those

years helped to safeguard its eventual fee.

Mr. Reed occasionally referred to the expenses paid by Reed

Realty Advisors as falling outside a budget approved by the relevant

project’s partners and the bank that financed the project. But the Reeds

have not provided copies of those budgets or any other documentary

evidence to support their claim. Moreover, it is not apparent why

unbudgeted expenses would have been the responsibility of Reed Realty

Advisors or would have threatened its compensation or the ultimate

success of the projects.

Second, the terms of Reed Realty Advisors’ compensation for the

projects are unclear. The record does not contain agreements between

Reed Realty Advisors and the project entities, nor does it speak to when,

how, or subject to what conditions Reed Realty Advisors would be paid

its fee. Without specificity as to Reed Realty Advisors’ stake in the

success of its projects, it is difficult to conclude that there was a “direct

nexus” between Reed Realty Advisors’ payments and its own incomeproducing activities. See, e.g., Bone v. Commissioner, 2001 WL 180170,

at *4.

Third, Mr. Reed was an investor in the projects for which Reed

Realty Advisors paid expenses. If the projects had succeeded, he would

have received a personal benefit. Mr. Reed’s personal stake in the

projects casts doubt on the possibility that benefits accruing to the

project entities from Reed Realty Advisors’ payments were “merely

incidental” to the payments’ true purpose. See, e.g., HIE Holdings, Inc.

v. Commissioner, 2009 WL 1586044, at *95.

[*29] All told, the record here does not support the conclusion that Reed

Realty Advisors paid the project entities’ expenses primarily for its own

benefit. We therefore find that the Reeds have failed to satisfy the first

prong of the Lohrke analysis and are not entitled to deduct the expenses

set out in Appendix C. 27

Transfers Made to Main Street Lofts and K Lofts

On the Schedules E attached to their 2014 and 2015 returns, the

Reeds claimed substantial deductions for amounts that they labeled

unreimbursed partnership expenses.

During trial, the parties

stipulated the timing and amounts of transfers the Reeds made to Main

Street Lofts and K Lofts during those years.

The Reeds now argue that the transfers are deductible (1) as

section 162 trade or business expenses of Reed Realty Advisors, similar

to the Schedule C expenses discussed above; (2) as unreimbursed

partnership expenses paid by the Reeds (consistent with their return

position); or (3) as partially or wholly worthless debts under section 166.

The Commissioner disagrees with each of these arguments.

We start by recalling that, as the Supreme Court has observed,

“while a taxpayer is free to organize his affairs as he chooses,

nevertheless, once having done so, he must accept the tax consequences

of his choice, whether contemplated or not.” Commissioner v. Nat’l

Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974); see also

Lomas Santa Fe, Inc. v. Commissioner, 693 F.2d 71, 73 (9th Cir. 1982)

(“[I]t is ultimately up to the taxpayer and not the courts to structure

transactions in a manner eligible for favorable tax treatment . . . .”), aff’g

74 T.C. 662 (1980). In other words, taxpayers are generally bound by

the form of the transaction that they choose. See Temnorod v.

Commissioner, T.C. Memo. 2025-127, at *19 (citing Commissioner v.

Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. at 149).

27 Similar reasons support the conclusion that the expenditures were not

ordinary and necessary expenses of Reed Realty Advisors’ business and thus that they

do not satisfy the second Lohrke prong.

[*30] Here, the Reeds transferred funds directly to Main Street Lofts

and K Lofts. In form, the transfers appear to be either contributions to

capital or loans made by the Reeds to the project entities. 28

The Reeds’ theories resist the form of the transfers. They would

require us to conclude that, by transferring funds to Main Street Lofts

and K Lofts, the Reeds actually paid the projects’ creditors. We are

unable to reach such a conclusion on the evidence before us, and thus

we must sustain the Commissioner’s determination that the Reeds are

not entitled to deductions for their transfers. 29

But this is not the only problem facing the Reeds’ arguments.

Even assuming that the Reeds actually paid the projects’ creditors by

making their transfers, the Reeds’ arguments fail as we explain below.

Trade or Business Expense Deduction

First, the Reeds argue that their transfers were truly payments,

by Reed Realty Advisors, of expenses belonging to Main Street Lofts and

K Lofts. Therefore, they contend, Reed Realty Advisors is entitled to a

deduction under section 162(a) with respect to those transfers. For this

argument to succeed, the transfers must have been “paid or incurred”

by Reed Realty Advisors and must not have been reimbursable. See

supra Opinion Part IV.A (explaining the requirements of section 162(a)).

“[D]eductions for expenses can be taken only by the party who

actually ‘paid or incurred’ them.” United States v. Cocke, 399 F.2d 433,

447 (5th Cir. 1968) (quoting § 162) (citing Helvering v. Price, 309 U.S.

409, 413 (1940)); Brown v. Commissioner, T.C. Memo. 2017-18, at *17–

18. Here, the Reeds made their transfers from their personal checking

accounts, rather than Reed Realty Advisors’ accounts. And Main Street

28 If the Reeds intend to argue that Main Street Lofts and K Lofts were

insolvent when the transfers were made, the transfers would nevertheless not be

deductible. See Scheurer v. Commissioner, T.C. Memo. 2017-36, at *11 (stating that

“[a]dvances made to an insolvent debtor generally do not create debts for tax purposes

but are characterized as capital contributions or gifts” and collecting authorities).

29 The Reeds have argued that their most substantial transfer, $200,000 sent

to K Lofts, was used to pay expenses arising from the collapse of a wall on the K Lofts

property. As we have explained, the record is not clear as to what occurred with respect

to this transfer. But, even if it were true that K Lofts used that amount to pay for

repairs or other expenses after the collapse, the fact that the Reeds transferred the

amount to K Lofts defeats their claim that they are entitled to deduct that amount as

an expense paid on behalf of K Lofts. Simply put, under the Reeds’ view of the facts,

the Reeds did not pay an expense for K Lofts—they paid K Lofts itself.

[*31] Lofts and K Lofts recorded nearly all of the transfers as loans from

Mr. Reed. These facts suggest that the Reeds themselves made the

transfers at issue here. That means that Reed Realty Advisors did not

“pay or incur” any amounts for which it would be entitled to a deduction.

This conclusion is bolstered by the obligations the Reeds had, in

their personal capacities, as guarantors of the project entities’ loans. At

trial, Mr. Reed testified that he made the transfers so that Main Street

Lofts and K Lofts could meet their loan obligations. Robert Dudley, an

executive from Riverside Bank, testified that he asked Mr. Reed to

support the project entities because he knew that Dr. Reed’s income

would allow the Reeds to make cash transfers. This testimony, together

with the record as a whole, further confirms that the Reeds made the

transfers in their personal capacities and that the transfers were not

“paid or incurred” by Reed Realty Advisors.

Even if Mr. Reed had made the transfers at issue in his role as

the owner of Reed Realty Advisors, it appears that the transfers were

treated by the projects as loans or advances that would be repaid.

Generally, a taxpayer cannot deduct an expenditure for which he can be

reimbursed. See Orvis v. Commissioner, 788 F.2d 1406, 1408 (9th Cir.

1986) (applying this rule in the context of reimbursable employee

expenses and collecting authorities), aff’g T.C. Memo. 1984-533; Canelo

v. Commissioner, 53 T.C. 217, 223–24 (1969), aff’d per curiam, 447 F.2d

484 (9th Cir. 1971); see also, e.g., Burnett v. Commissioner, 356 F.2d 755,

759–60 (5th Cir. 1966) (“[I]t is well settled that an expenditure for which

there is an unconditional right of reimbursement is not deductible as a

business expense . . . .”), remanding on other issues 42 T.C. 9 (1964); Levy

v. Commissioner, 212 F.2d 552, 554–55 (5th Cir. 1954) (“It is well settled

that expenses for which there exists a right of reimbursement are not

ordinary and necessary business expenses . . . .”), aff’g 12 T.C.M. (CCH)

235 (1953); Glendinning, McLeish & Co. v. Commissioner, 61 F.2d 950,

952 (2d Cir. 1932) (noting that amounts for which reimbursement could

be sought “could not be expenses of any kind” and were not deductible

as ordinary and necessary expenses), aff’g 24 B.T.A. 518 (1931). “The

reason for not allowing a deduction under the above principle is that the

expenditures, being in the nature of advances or loans to a third party,

are not expenses of the taxpayer’s business.” Flower v. Commissioner,

61 T.C. 140, 152 (1973), aff’d, 505 F.2d 1302 (5th Cir. 1974) (unpublished

table decision).

Main Street Lofts and K Lofts recorded most of Mr. Reed’s

transfers as loans. And exhibits in the record support the conclusion

[*32] that the project entities repaid some of these amounts to Mr. Reed

during 2014, decreasing the loan account balances as they did so. The

Reeds have offered no persuasive explanation for why the project

entities treated most of Mr. Reed’s transfers as loans if they were not

reimbursable. As a result, we conclude that the Reeds cannot deduct

their transfers as trade or business expenses of Reed Realty Advisors

under section 162(a).

Unreimbursed Partnership Expenses

Second, the Reeds argue that their transfers were unreimbursed

partnership expenses. “It is well established that a partner cannot

himself deduct the expenses of a partnership, even if he incurred the

expenses in furtherance of partnership business.”

Probandt v.

Commissioner, T.C. Memo. 2016-135, at *22–23 (collecting authorities).

“An exception applies when there is an agreement among the partners

in a partnership agreement, or in a routine partnership practice

tantamount to an agreement, that calls for a partner to pay partnership

expenses out of his own funds.” Id. at *23; see Klein v. Commissioner,

25 T.C. 1045, 1051–52 (1956). The requirements of this exception doom

the Reeds’ theory.

The Reeds have not established that Mr. Reed was required to

pay expenses of the project entities by a partnership agreement or

tantamount practice. Neither the operating agreement for Main Street

Lofts nor that for K Lofts contains such a requirement, and the Reeds

have not provided other persuasive evidence that such an agreement or

practice existed.

The Reeds contend that Mr. Reed’s guaranty agreements satisfy

Klein’s agreement requirement. This is incorrect. In Klein, 25 T.C. at

1051–52, we stated that an exception applies when a partner is required

“under a partnership agreement” to pay certain expenses. Although

Mr. Reed’s guaranties are agreements, they are not partnership

agreements.

Moreover, for the Klein exception to apply, a partner must be

required to pay an expense “out of his own funds.” Id. A partner entitled

to reimbursement is not required to pay an expense out of his own funds.

See, e.g., McLauchlan v. Commissioner, 558 F. App’x 374, 379 (5th Cir.

2014) (“The requirement that an expense not be reimbursable by the

partnership in order to be deductible flows from the fact that

partnership expenses may only be deducted on an individual partner’s

[*33] tax return if the partnership agreement provides ‘such expenses

shall be borne by particular partners out of their own funds.’ Wallendal

[v. Commissioner], 31 T.C. [1249,] 1252 [(1959)] (emphasis added).”),

aff’g in relevant part T.C. Memo. 2011-289; Frazier v. Commissioner,

T.C. Memo. 2024-3, at *128. As discussed above, the Reeds have not

established that they were not entitled to reimbursement for their

Thus, the Reeds cannot deduct their transfers as

transfers. 30

unreimbursed partnership expenses.

Partially or Wholly Worthless Debts

Third, the Reeds argue that their transfers were guaranty

payments for which they are entitled to a worthless debt deduction

under section 166. Treasury Regulation § 1.166-9 provides that a

guarantor’s payment can give rise to a worthless debt deduction when

the underlying debt between the debtor and the guarantor becomes

worthless. 31 When a guarantor pays a debt, “the debtor’s obligation to

the creditor becomes an obligation to the guarantor” because the

guarantor “steps into the creditor’s shoes.” Putnam v. Commissioner,

352 U.S. at 85. When the debtor’s obligation to the guarantor becomes

worthless, the guarantor is entitled to a deduction under section 166.

Id. (“[T]he loss sustained by the guarantor unable to recover from the

debtor is by its very nature a loss from the worthlessness of a debt.”);

Treas. Reg. § 1.166-9(a), (e)(2).

“Debts are wholly worthless when there are reasonable grounds

for abandoning any hope of repayment in the future, Dallmeyer v.

Commissioner, 14 T.C. 1282, 1292 (1950), and it could thus be concluded

that they have lost their ‘last vestige of value.’ Bodzy v. Commissioner,

321 F.2d 331, 335 (5th Cir. 1963)[, rev’g and remanding T.C. Memo.

1962-40].” Estate of Mann v. United States, 731 F.2d 267, 276 (5th Cir.

1984). “When or whether a debt becomes worthless is a question of fact,

30 The Reeds’ argument that their transfers were compelled by Mr. Reed’s

guaranty agreements cuts against the conclusion that the transfers were not

reimbursable. “The familiar rule is that, instanter upon the payment by the guarantor

of the debt, the debtor’s obligation to the creditor becomes an obligation to the

guarantor . . . .” Putnam v. Commissioner, 352 U.S. 82, 85 & n.8 (1956) (collecting

authorities). If Mr. Reed made payments pursuant to his guaranty of the project

entities’ obligations, the entities owed the amounts of those payments back to

Mr. Reed. This, coupled with the Reeds’ failure to prove that the entities could not

repay the obligations, is enough to conclude that the Reeds have not established that

the transfers could not be reimbursed.

31 We assume solely for purposes of our analysis that the prerequisites for the

application of Treasury Regulation § 1.166-9 are met.

[*34] the answer to which lies in an examination of all the

circumstances.” Am. Offshore, Inc. v. Commissioner, 97 T.C. 579, 594

(1991) (citing Boehm v. Commissioner, 326 U.S. 287, 293 (1945)). A bad

debt is deductible only for the year it becomes worthless. Id. (collecting

authorities).

The Reeds have not established that the obligations arising from

their transfers became partially or wholly worthless during the years at

issue. As discussed above, Main Street Lofts and K Lofts tracked the

amounts owed to Mr. Reed as loans. Although Main Street Lofts and

K Lofts may have been without cash at the time of Mr. Reed’s transfers,

repayment may have been possible if the projects had later rented or

sold their properties. 32

Additionally, as discussed at trial, other guarantors were jointly

and severally liable for the project entities’ construction loans. The

Reeds have not demonstrated that they could not have recovered at least

a portion of the transferred funds from their co-guarantors. At trial,

Mr. Reed observed that one of the other guarantors for Main Street

Lofts’ loan—Wooten Epes—held real estate interests but was not liquid:

I wanted him to pay for some of them. I didn’t want

to have to even pay for them, but it’s not always easy to

liquidate a percentage ownership in, like, an apartment

building. It’s hard to monetize and trade, especially if the

people that own the rest of the ownership percentage are

not interested in buying your share out.

Tr. 722. But the fact that Mr. Epes’s wealth was in real estate interests

does not mean that it would have been impossible to collect from him.

Mr. Epes could have satisfied the obligation to Mr. Reed by, for example,

transferring a real estate interest. Because Mr. Reed could have sought

contribution from other guarantors of the project entities’ loans, the

Reeds have not established that any obligations of the project entities to

him became worthless during the years at issue.

32 After the years at issue, Deep Creek acquired K Lofts, and, in the

transaction, Mr. Reed exchanged his member units in K Lofts for member units in

Deep Creek. These actions suggest that he had not yet “abandon[ed] any hope of

repayment in the future,” Estate of Mann, 731 F.2d at 276 (citing Dallmeyer, 14 T.C.

at 1292), and that K Lofts had not yet “lost [its] ‘last vestige of value,’” id. (quoting

Bodzy v. Commissioner, 321 F.2d at 335).

[*35] And, to the extent the Reeds argue that any obligations of the

project entities to Mr. Reed became partially worthless during the years

at issue, the Reeds have provided no evidence that they charged off any

part of the obligations during those years as required by Treasury

Regulation § 1.166-3(a)(2). Accordingly, we conclude that the Reeds

cannot deduct their transfers as partially or wholly worthless debts

during the years at issue.

Having addressed the Reeds’ arguments, we find ourselves back

where we started. The Reeds appear to have made capital contributions

or loans to the project entities. If the Reeds’ transfers were capital

contributions, they are not entitled to deductions for them. If they were

loans—as Main Street Lofts’ and K Lofts’ accounting treatment would

suggest—then the Reeds have not established that they were worthless

in the years at issue. 33 The Reeds therefore are not entitled to

deductions for the transfers they made.

Amounts Paid for the Reeds’ Farm Lease

On their 2013 return, the Reeds claimed a $50,000 deduction for

rent in connection with a farming activity. The Commissioner

disallowed that deduction. The Reeds argue that the $50,000 was rent

paid for the farm they used during 2013. Their argument is supported

by Mr. Reed’s testimony as to the oral agreement between him and the

landowner.

The Commissioner argues that the $50,000 amount exceeds the

ordinary rental value of the property and suggests that a portion of the

amount was paid for the option to purchase the farmland, rather than

as rent.

Section 162(a)(3) permits a deduction for “rentals or other

payments required to be made as a condition to the continued use or

possession, for purposes of the trade or business, of property to which

the taxpayer has not taken or is not taking title or in which he has no

equity.” See also Treas. Reg. § 1.162-11(a) (allowing a deduction for

payments made to acquire a leasehold).

33 Our conclusion on this issue does not preclude the possibility that any loans

to Main Street Lofts and K Lofts became worthless in later years.

[*36] At trial, Mr. Reed testified that the Reeds’ payments to the

landowner in 2013, totaling $50,000, were rental payments for the

farmland they used in that year. Although Mr. Reed acknowledged that

he held an option to purchase the property, when asked whether his

payments represented a deposit or advance on the ultimate purchase

price for the property, he testified that the payments were “for 12

months of renting the property and occupying.” Tr. 564.

The Commissioner has provided no evidence contrary to

Mr. Reed’s testimony. On brief, the Commissioner suggests that the

landowner had stated that the $50,000 paid by Mr. Reed exceeded the

fair market value of a one-year lease on the property. Rep’t’s Op. Br.

171. But the Commissioner has not provided evidence of any such

statement.

The landowner did not testify at trial, and the

Commissioner’s assertion on brief that the landowner once made a

statement about the fair market value of leasing the property is not

evidence. See Rule 143(c); Niedringhaus v. Commissioner, 99 T.C. 202,

214 n.7 (1992).

On this issue, we credit Mr. Reed’s unrebutted testimony. We

conclude that the Reeds are entitled to deduct their $50,000 rent

expense for their 2013 taxable year.

Interest Expense Amounts Claimed for 2015

On the Schedule C attached to their 2015 return, the Reeds

claimed a $27,215 interest expense deduction. The Commissioner

disallowed the deduction.

The Reeds do not address the claimed deduction in posttrial

briefing. Although their briefs refer to interest and interest expenses

generally, those references appear to relate to the Reeds’ transfers to the

project entities, discussed above in Opinion Part IV.B. Because the

Reeds have not specifically addressed on brief their entitlement to a

$27,215 interest expense deduction, they have abandoned the issue.

See, e.g., Mendes, 121 T.C. at 312–13; Nicklaus, 117 T.C. at 120 n.4; see

also, e.g., Miller, 797 F.2d at 738.

Even if the issue were not abandoned, the record does not support

the conclusion that the Reeds are entitled to an interest expense

deduction for 2015. At trial, Mr. Reed testified that the expense arose

from two loans. The first loan, according to Mr. Reed, was made to him

by his father. The second was made by Connie DeMerell to a real estate

[*37] project entity, Capitol Lofts, LLC. Mr. Reed testified that he

“personally” paid the interest due on the purported loans. Tr. 584.

Even if these loans existed, the record does not reflect the amount

of interest paid on each loan or when such interest was paid. With

respect to the purported loan from Mr. Reed’s father, the parties have

stipulated a letter dated March 19, 2017, which states:

On April 4, 2012, I loaned Scott L. Reed $12,500. The loan

will accrue interest at the 10-year U.S. Treasury Rate. All

principal and interest on this loan will be due upon the sale

of the Hall Davidson Buildings in Little Rock or by April 3,

2018, which ever [sic] comes first.

Ex. 67-P, at 1. Neither party has established when principal and

interest on the purported loan ultimately became due, nor when they

were paid, if at all. And the terms of the purported loan from

Ms. DeMerell to Capitol Lofts, LLC, are even less clear. 34

Further, the Reeds have not identified any Code provision or

other authority that would allow Mr. Reed to pay interest owed by

Capitol Lofts, LLC, to Ms. DeMerell and deduct it as the Reeds’ own

interest expense.

To summarize, the Reeds have abandoned the issue as to whether

they are entitled to deduct as interest the $27,215 shown on their

Schedule C for 2015. And the record does not support the conclusion

that the Reeds paid interest in 2015 or that any interest they paid was

deductible. Thus, we must sustain the Commissioner’s determination

with respect to the Reeds’ 2015 interest expense.

Having resolved the Reeds’ claims for deductions, we turn next to

their claimed credit for the 2012 taxable year.

2012 General Business Credit

On their 2012 return, the Reeds claimed a section 38 general

business credit of $99,800 for rehabilitating the K Lofts property. They

claimed the credit on Form 3800 and specified the full amount as an

34 In his Opening Brief, the Commissioner points to an option agreement

permitting Mr. Reed to purchase an interest in Capitol Lofts, LLC, from Ms. DeMerell,

suggesting that the Reeds’ claimed interest expense included payments for the option.

The relationship between the purported loan from Ms. DeMerell and the option

agreement, however, is unclear.

[*38] investment credit. An attached Form 3468 reported that the full

$99,800 represented a rehabilitation credit.

The Commissioner

disallowed the credit.

The Reeds have not addressed their entitlement to the credit in

posttrial briefing. They have therefore abandoned this issue, and the

Court will not consider it. See, e.g., Mendes, 121 T.C. at 312–13;

Nicklaus, 117 T.C. at 120 n.4; see also, e.g., Miller, 797 F.2d at 738. 35

Next, we address the Reeds’ liability for additions to tax and

penalties the Commissioner determined.

VI.

Additions to Tax and Penalties

Additions to Tax for Failure to File a Timely Return

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

timely return unless the taxpayer proves that such failure is due to

reasonable cause and not willful neglect. See Wheeler v. Commissioner,

127 T.C. 200, 207 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008).

Under section 7491(c), the Commissioner bears the burden of

production with respect to the liability of any individual for an addition

to tax. See Higbee, 116 T.C. at 446. Here, the parties have stipulated

certified transcripts of the Reeds’ accounts for the taxable years 2012

through 2015, which reflect the dates on which the Reeds’ returns were

due during the years at issue. The parties have also stipulated the dates

on which the Reeds filed their returns. Those stipulations confirm that

the Reeds filed their 2012, 2013, 2014, and 2015 returns late and satisfy

the Commissioner’s burden of production with respect to the additions

to tax.

Once the Commissioner has met his burden of production, the

taxpayer bears the burden of proving that the late filing was due to

35 In any event, it appears doubtful that the Reeds would be entitled to the

credit for the taxable year 2012. As in effect for that year, section 47 provided a credit

equal to a percentage of the “qualified rehabilitation expenditures” with respect to

certain buildings and structures. I.R.C. § 47(a). And section 47(b) provided that

“[q]ualified rehabilitation expenditures with respect to any qualified rehabilitated

building shall be taken into account for the taxable year in which such qualified

rehabilitated building is placed in service.” See generally Consumers Power Co. v.

Commissioner, 89 T.C. 710, 723–26 (1987) (discussing when property is “placed in

service”). The record here does not suggest that K Lofts’ property was placed in service

before or during 2012.

[*39] reasonable cause and not willful neglect. See Rule 142(a); Higbee,

116 T.C. at 447. The Reeds have not addressed their liability for the

section 6651(a)(1) additions to tax in their posttrial briefing, and

therefore they have abandoned the issue. See, e.g., Mendes, 121 T.C.

at 312–13; Nicklaus, 117 T.C. at 120 n.4; see also, e.g., Miller, 797 F.2d

at 738. Moreover, the record does not appear to support a finding of

reasonable cause. Therefore, we conclude that the Reeds are liable for

the section 6651(a)(1) additions to tax.

Substantial Understatement Penalty

Section 6662 imposes an accuracy-related penalty equal to 20% of

the portion of any underpayment of tax required to be shown on a return

that is attributable to any substantial understatement of income tax.

See I.R.C. § 6662(a), (b)(2). An understatement of income tax is

“substantial” if it exceeds the greater of “10 percent of the tax required

to be shown on the return for the taxable year” or “$5,000.” I.R.C.

§ 6662(d)(1)(A).

The Commissioner bears the burden of production with respect to

the liability of an individual for any penalty. I.R.C. § 7491(c); Higbee,

116 T.C. at 446. The Commissioner may satisfy this burden by

presenting sufficient evidence to show that it is appropriate to impose

the penalty in the absence of available defenses. See Graev v.

Commissioner, 149 T.C. 485, 493 (2017) (citing Higbee, 116 T.C. at 446),

supplementing and overruling in part 147 T.C. 460 (2016). For the

Commissioner to meet his burden with respect to the substantial

understatement penalty, Rule 155 computations must confirm a

substantial understatement. Clay v. Commissioner, 152 T.C. 223, 246

(2019), aff’d, 990 F.3d 1296 (11th Cir. 2021); George v. Commissioner,

T.C. Memo. 2026-10, at *82.

The Commissioner must also show compliance with the

procedural requirements of section 6751(b)(1). See I.R.C. § 7491(c);

Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066,

1072–74 (9th Cir. 2022), rev’g and remanding 154 T.C. 68 (2020); see

also Kraske v. Commissioner, 161 T.C. 104, 111 (2023).

Section 6751(b)(1) provides that no penalty shall be assessed

unless “the initial determination” of the assessment was “personally

approved (in writing) by the immediate supervisor of the individual

making such determination.” Here, the record contains a Civil Penalty

Approval Form signed by the examining agent’s supervisor on

[*40] November 29, 2016. That approval was received timely under the

rule set out in Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner,

29 F.4th at 1072–74. Accordingly, the Commissioner has satisfied his

burden with respect to the supervisory approval requirement of section

6751(b)(1), see Kraske, 161 T.C. at 111, and the Reeds do not contend

otherwise.

No penalty is imposed under section 6662 with respect to any

portion of an underpayment “if it is shown that there was a reasonable

cause for such portion and that the taxpayer acted in good faith with

respect to [it].” I.R.C. § 6664(c)(1). The Reeds have the burden to

establish that they are excused from the penalty for reasonable cause.

See United States v. Boyle, 469 U.S. 241, 245 (1985); see also Cooper v.

Commissioner, 877 F.3d at 1095. But the Reeds have not argued that

there was a reasonable cause for any portion of their underpayment.

Nor does the record appear to reflect that reasonable cause existed.

We conclude, therefore, that, if the Rule 155 computations

confirm a substantial understatement exists, the Reeds are liable for an

accuracy-related penalty under section 6662.

We have considered all other arguments made by the parties, and

to the extent not discussed above, find those arguments to be irrelevant,

moot, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

[*41]

APPENDIX A: ALLOWED DEDUCTIONS

Taxable Year 2012

Date

Description

Amount

3/16/2012

LDH Drafting

$1,000

4/2/2012

Standard Abstract

10,000

4/5/2012

T. Chuba

5,000

4/13/2012

BRC

2,500

5/3/2012

T. Chuba

5,000

5/15/2012

LDH Drafting

2,000

6/20/2012

LDH Drafting

2,000

7/2/2012

LDH Drafting

2,000

7/17/2012

Tax Resources

9/11/2012

BRC

483

9/17/2012

LDH Drafting

12/3/2012

BRC

470

12/19/2012

Notary

100

Total

2,000

$32,593

Taxable Year 2013

Date

Description

Amount

1/22/2013

David Robinson

$7,500

2/5/2013

David Robinson

3,500

2/19/2013

David Robinson

2,000

2/27/2013

David Robinson

2,000

3/15/2013

David Robinson

2,000

4/1/2013

David Robinson

2,000

4/15/2013

David Robinson

2,000

4/15/2013

Dzyuba Consulting

5,000

5/2/2013

David Robinson

7,000

5/2/2013

Wiggington & Associates

1,975

5/9/2013

Tiempo Architecture

5,000

[*42]

5/15/2013

David Robinson

2,000

5/21/2013

David Robinson

1,143

6/5/2013

David Robinson

3,500

7/3/2013

David Robinson

2,353

7/3/2013

Dzyuba Consulting

703

7/12/2013

Dzyuba Consulting

4,478

7/15/2013

David Robinson

2,000

7/29/2013

Dzyuba Consulting

3,423

8/1/2013

David Robinson

2,000

8/15/2013

Day Law Group

2,500

8/16/2013

David Robinson

2,000

8/29/2013

David Robinson

2,000

9/3/2013

David Robinson

5,000

9/17/2013

David Robinson

2,000

9/23/2013

Dzyuba Consulting

3,061

10/7/2013

David Robinson

2,000

10/7/2013

Dzyuba Consulting

3,398

10/17/2013

David Robinson

2,000

12/20/2013

Mitchell Williams

133

Total

$85,667

Taxable Year 2014

Date

Description

Amount

1/6/2014

Aggressive Credit

$59

1/10/2014

EMS

3,000

1/13/2014

3J Consulting

3,840

1/13/2014

3J Consulting

1,000

1/14/2014

Landcaster Engineering

450

1/24/2014

Experian

2/6/2014

Aggressive Credit

2/7/2014

Experian

2/7/2014

Studio Eccos Design

3,000

[*43]

2/18/2014

CRE

1,750

2/24/2014

Experian

2/25/2014

Landcaster Engineering

450

3/6/2014

Aggressive Credit

3/12/2014

3J Consulting

9,310

3/17/2014

EMS

6,000

3/24/2014

Experian

3/27/2014

CRE

105

4/6/2014

Aggressive Credit

4/8/2014

Studio Eccos Design

1,993

5/7/2014

LDH Drafting

10,000

5/27/2014

Experian

6/6/2014

Aggressive Credit

6/24/2014

Experian

6/25/2014

MyFICO

7/6/2014

Aggressive Credit

7/24/2014

Experian

7/29/2014

Brownfield Revitalization

30,000

7/30/2014

Novogradac

5,000

8/20/2014

Perkins Coie 36

1,000

8/25/2014

Experian

8/28/2014

OR Sec State

100

9/8/2014

Aggressive Credit

9/24/2014

Experian

9/24/2014

MoJo Architects

9/24/2014

Washington County

9/26/2014

Dzyuba Consulting

5,229

10/2/2014

Perkins Coie

1,500

10/6/2014

Aggressive Credit

10/6/2014

BofA Practice

625

2,200

36 The parties’ spreadsheets reflect payments made to “Perkins Cole.”

Testimony at trial, however, indicated that these payments were made to the law firm

Perkins Coie.

[*44]

10/7/2014

Studio Eccos Design

3,081

10/15/2014

3J Consulting

2,956

10/24/2014

Experian

11/6/2014

Aggressive Credit

11/24/2014

Experian

12/8/2014

Aggressive Credit

12/8/2014

Terracon

2,000

12/10/2014

Perkins Coie

4,489

Total

$99,731

Taxable Year 2015

Date

Description

Amount

1/27/2015

Mitchell Williams

$2,101

2/10/2015

Dzyuba Consulting

1,777

3/16/2015

Josh Blevins

1,250

3/23/2015

Dzyuba Consulting

5,000

3/26/2015

Good Ground Holdings

1,507

4/10/2015

Josh Blevins

500

4/15/2015

Josh Blevins

750

5/4/2015

Josh Blevins

1,000

5/13/2015

Perkins Coie

3,314

5/22/2015

Good Ground Holdings

2,400

5/22/2015

Josh Blevins

3,423

5/29/2015

Dzyuba Consulting

2,675

5/29/2015

Perkins Coie

2,709

7/3/2015

Good Ground Holdings

1,600

7/28/2015

Perkins Coie

3,000

7/29/2015

3J Consulting

562

8/18/2015

Mitchell Williams

9/11/2015

Josh Blevins

753

9/16/2015

Josh Blevins

1,000

9/24/2015

Perkins Coie

3,710

1,100

[*45]

10/28/2015

Perkins Coie

5,691

12/8/2015

Perkins Coie

5,188

12/8/2015

Studio Eccos

6,975

12/16/2015

Oregon Law Group

4,748

12/31/2015

Susman, Duffy & Sega

10,000

12/31/2015

William Kraus

4,000

Total

$76,733

[*46]

APPENDIX B: DISALLOWED DEDUCTIONS

Taxable Year 2012

Date

Description

Amount

2/22/2012

Check #2040

$50

3/7/2012

Transfer 0306

20,460

4/13/2012

Transfer 0306

250

5/15/2012

Transfer 0306

4,120

5/21/2012

Transfer 0306

2,025

5/31/2012

J. Reed

6/6/2012

Check #2021

4,000

6/15/2012

Transfer 0306

2,100

7/12/2012

Carpet cleaning

314

9/6/2012

Transfer 0292

9,411

11/5/2012

Transfer #2603

2,500

11/19/2012

Dalquist

12/3/2012

Transfer #2603

2,000

12/10/2012

Transfer 0306

4,000

Total

$52,705

500

975

Taxable Year 2013

Date

Description

Amount

1/10/2013

Marilyn Porter

$3,200

11/18/2013

Troy Carpenter

1,600

Total

$4,800

[*47]

Taxable Year 2014

Date

Description

Amount

1/24/2014

Will & Sons Excavation

$900

1/28/2014

Bob Coron Electric

200

3/3/2014

Brian Boger

105

3/20/2014

AOA

3/24/2014

Delasco Dermalogic Council

295

3/24/2014

Trust Company

1,300

5/14/2014

RDNW

78,080

5/16/2014

Corporate Division

400

7/21/2014

Washington Park

8/1/2014

CJ Brown Sales

2,500

8/7/2014

RDNW

5,021

8/11/2014

All Weather HVAC

2,500

8/28/2014

Chad Rummonds

500

10/14/2014

RDNW

4,000

10/16/2014

RDNW

500

11/5/2014

Reed Dermatology NW

2,000

11/10/2014

Advantage Services

3,275

11/18/2014

Advantage Services

3,275

11/28/2014

RDNW

12,000

11/28/2014

RDNW

50,000

12/12/2014

RDNW

4,000

Total

$170,912

Taxable Year 2015

Date

Description

Amount

6/8/2015

Orchard Supply

$18

8/3/2015

Orchard Supply

12/14/2015

Orchard Supply

112

Total

$134

[*48]

APPENDIX C: DISALLOWED DEDUCTIONS

Taxable Year 2012

Date

Description

Amount

1/6/2012

JRC

$5,188

1/10/2012

JRC

120

1/12/2012

Top Notch Turf

1/23/2012

JRC

200

1/31/2012

JRC

500

1/31/2012

JRC

350

1/31/2012

Transfer 0306

2/10/2012

JRC

850

2/15/2012

JRC

12,000

2/24/2012

JRC

100

2/24/2012

JRC

2/29/2012

JRC

3,200

3/15/2012

JRC

750

3/30/2012

JRC

220

4/4/2012

JRC

110

4/5/2012

JRC

3,620

4/30/2012

JRC

1,300

5/4/2012

JRC

750

6/19/2012

Porter Design

6/25/2012

Cleaning

250

7/11/2012

Landscaping

7/31/2012

JRC

311

8/22/2012

Landscaping

120

10/16/2012

Landscaping

150

11/7/2012

Landscaping

120

12/5/2012

Landscaping

12/31/2012

Porter Design

3,200

Total

$38,974

2,600

2,700

[*49]

Taxable Year 2013

Date

Description

Amount

1/8/2013

Creative Construction

$20,000

1/9/2013

Bruce Reed

1,000

1/17/2013

Creative Construction

10,000

1/22/2013

Creative Construction

25,000

2/5/2013

Creative Construction

15,000

2/13/2013

Creative Construction

10,000

2/19/2013

Creative Construction

20,000

4/1/2013

Creative Construction

10,000

4/24/2013

Creative Construction

5,000

4/29/2013

Creative Construction

15,858

4/30/2013

Bruce Reed

5,000

5/6/2013

Creative Construction

12,939

5/10/2013

Creative Construction

9,038

5/22/2013

Creative Construction

25,292

5/22/2013

Creative Construction

8,741

5/28/2013

Creative Construction

12,500

5/29/2013

Creative Construction

10,197

6/10/2013

Creative Construction

9,356

6/17/2013

Creative Construction

4,454

6/21/2013

Creative Construction

8,284

6/26/2013

Creative Construction

8,500

6/28/2013

Creative Construction

6,354

10/24/2013

Creative Construction

4,000

Total

$256,513

[*50]

Taxable Year 2014

Date

Description

Amount

3/26/2014

Matt Foster

$6,303

6/16/2014

Angel Bueno

120

6/18/2014

MWF Construction

6/30/2014

Angel Bueno

7/9/2014

MWF Construction

8/11/2014

Angel Bueno

100

8/18/2014

Angel Bueno

120

8/21/2014

MWF Construction

10/14/2014

Angel Bueno

10/29/2014

MWF Construction

5,400

11/20/2014

MWF Construction

3,900

11/28/2014

Angel Bueno

12/09/2014

MWF Construction

1,050

Total

$34,533

6,400

100

3,989

6,921

Taxable Year 2015

Date

Description

Amount

1/8/2015

MWF Construction

$2,685

1/30/2015

MWF Construction Cashier

Check

12,000

Total

$14,685

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.