Engstrom, Lipscomb & Lack, APC v. Commissioner

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS DEC 28 2016
FOR THE NINTH CIRCUIT MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
ENGSTROM, LIPSCOMB & LACK, No. 15-70591
APC,
Tax Ct. No. 27364-12
Petitioner-Appellant,
v. MEMORANDUM*
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.
Appeal from a Decision of the
United States Tax Court
Argued and Submitted December 6, 2016
Pasadena, California
Before: CALLAHAN, BEA, and IKUTA, Circuit Judges.
Engstrom, Lipscomb & Lack, APC (“Engstrom”) appeals from the Tax
Court’s decision finding that Engstrom had tax deficiencies in tax years 2008 and
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
2010 and that accuracy-related penalties were warranted. We have jurisdiction
pursuant to 26 U.S.C. § 7482(a)(1), and affirm.1
Pursuant to 26 U.S.C. § 274(d), to claim a travel expense as a deduction, the
taxpayer must substantiate the expense with evidence showing, among other
things, the cost and business purpose of the claimed expense. Treasury Regulation
§ 1.274-5T(c)(2)(ii)(B) provides that, “[w]here the business purpose is evident
from the surrounding facts and circumstances, a written explanation of such
business purpose will not be required.” Relying on Treasury Regulation § 1.274-
5T(c)(2)(ii)(B), as well as the evidence it presented to the Tax Court, Engstrom
claims that it is entitled deduct all of its payments to G&L Aviation.
The Tax Court’s determination that Engstrom’s evidence was adequate to
substantiate some, but not all, of Engstrom’s payments to G&L Aviation is not
error, clear or otherwise. See Sparkman v. Comm’r, 509 F.3d 1149, 1159 (9th Cir.
2007) (stating that clear error review applies to the Tax Court’s substantiation
findings). First, despite arguing that it had agreed to pay G&L Aviation the
amounts claimed as deductions in exchange for 24-hour-standby use of G&L
Aviation’s aircrafts, Engstrom produced no written record of such an agreement
1
As the parties are familiar with the facts and procedural history, we
restate them here only as necessary to explain our decision.
2
and the offered testimony did not clearly establish the alleged agreement’s
existence. The Tax Court could rely on evidence that weighed against Engstrom’s
theory, such as the fact that the planes were flown for personal use, and that
Engstrom’s claimed payment for standby use also included rent for a Staples
Center suite that Engstrom has since conceded is not properly deductible.
The Tax Court did not err in the method it adopted for determining business
purpose and calculating allowable deductions. Engstrom’s evidence did not clearly
show that all of the flights in question had a business purpose. Of the flights with a
substantiated business purpose, Engstrom put forward no evidence establishing
their individualized cost. Thus, the Tax Court could rely upon Ms. Rebekah
Herbert’s testimony to set each flight’s value. See Norgaard v. Comm’r, 939 F.2d
874, 879 (9th Cir. 1991) (stating that the Tax Court has “considerable latitude in
estimating the amount of the allowable deduction”). As a result, the Tax Court’s
conclusion that Engstrom could not deduct as a travel expense the entire amount it
had paid to G&L Aviation is not error.
Additionally, the Tax Court’s finding that Engstrom could not deduct Walter
Lack’s payments to G&L Aviation as a travel expense is not error. Engstrom
contends that Lack’s payments to G&L Aviation constitute deductible loans, as the
payments related to Lack’s travel on behalf of Engstrom and both parties intended
3
for Engstrom to reimburse Lack the amounts he had paid. In Welch v.
Commissioner, we stated that, in addition to “ask[ing] whether, when the funds
were advanced, the parties actually intended repayment,” courts are to employ the
following non-exhaustive, seven-factor test when determining whether a
transaction constitutes a “true loan”:
(1) whether the promise to repay is evidenced by a note or other
instrument; (2) whether interest was charged; (3) whether a fixed
schedule for repayments was established; (4) whether collateral was
given to secure payment; (5) whether repayments were made; (6)
whether the borrower had a reasonable prospect of repaying the loan
and whether the lender had sufficient funds to advance the loan; and
(7) whether the parties conducted themselves as if the transaction
were a loan.
204 F.3d 1228, 1230 (9th Cir. 2000). “[N]o single factor is dispositive.” Id.
In light of Welch’s instruction, the Tax Court did not err in finding that
Lack’s payments were not loans. See id. at 1230–31 (applying clear error review
to the Tax Court’s loan determination). While there is some evidence to support
Engstrom’s position, there is more than enough evidence to sustain the Tax Court’s
conclusion that Lack’s payments were to satisfy his personal obligations to G&L
Aviation, not Engstrom’s. Accordingly, Engstrom is not entitled to claim Lack’s
payments to G&L Aviation as a travel expense.
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Last, the Tax Court did not err in concluding that accuracy-related penalties
were warranted. Accuracy-related penalties are assessed when a tax underpayment
is due to a taxpayer’s “[n]egligence or disregard of rules or regulations.” 26 U.S.C.
§ 6662(a)–(b). Here, the assessment of the penalties hinged upon whether the
claimed travel expenses were adequately substantiated. Because the majority of
these expenses were not, and Engstrom failed to demonstrate that its lack of
substantiation was reasonable, see id. § 6664(c)(1) (stating that accuracy-related
penalties shall not be imposed “if it is shown that there was a reasonable cause for”
a tax underpayment and “the taxpayer acted in good faith”), the Tax Court
correctly concluded that accuracy-related penalties could be assessed against
Engstrom.
AFFIRMED.
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