The Tax Court denied a taxpayer's claim that deposits to his bank account were not taxable income but repayments of amounts he had loaned his mother to pay her own tax debts and to buy real properties.
Facts: Christopher Dufresne worked as a psychic counselor in the S corporation business of his mother, Sylvia Browne, a well-known psychic who authored books, lectured, and made television appearances. Between 2004 and 2010, he earned about $14 million from the company, but each year after, his reported wages for income tax purposes were a fraction of that amount and zero in 2013.
In 2014, the IRS examined Dufresne's returns for 2010 through 2013, determining he had unreported cash bank deposits totaling more than $1.5 million in those years. Determining the amounts were taxable income, the Service assessed deficiencies totaling more than $500,000 and accuracy-related penalties totaling in excess of $101,000. Sylvia Browne was ill and in debt and filed for bankruptcy in the years before she died in 2013, and the corporation was dissolved in 2015.
Issues: Dufresne contended the deposits were not taxable income because they were repayments of amounts he had loaned his mother. He produced a letter dated January 2008, stating that his mother owed him $1,182,670 for purchases of five real estate properties Dufresne had made on her behalf, although he was the owner of record during the years at issue. She paid him rent on one of the properties. A second letter, dated February 2010, stated that Browne owed Dufresne $307,718 for paying past-due federal taxes on her behalf. Both letters bore Browne's signature, but neither addressed terms of regular repayment, interest, or collateral or security, nor did Dufresne produce any other evidence to that effect. However, he testified at trial that he had expected his mother to repay him and introduced a list of bank deposit amounts that he said were such repayments.
The IRS contended that the bank deposits were disguised compensation for Dufresne's work for the psychic business and were unreported taxable income. Dufresne countered that he was willing to accept the lower salary because of his mother's ill health and their close relationship, and he believed the corporation would be able to pay him his customary salary eventually.
Holding: Noting that intrafamily purported loans are subject to heightened scrutiny, the Tax Court analyzed them according to objective factors from case law indicating an intent to establish a bona fide loan:
- The borrower's ability to repay;
- Whether a debt instrument is made;
- Security, interest, a fixed repayment date, and a repayment schedule;
- Any records of a loan, and the parties' conduct concerning it;
- Whether repayments were made;
- Whether the lender had demanded repayment;
- The likelihood that the loans were disguised compensation for services; and
- The testimony of the purported borrower.
Noting that, according to Dufresne's testimony, his mother had poor credit, the Tax Court found no evidence she would have been able to repay the purported loans. While acknowledging previous holdings that intrafamily debt is often informal, the court held that the lack of any contemporaneous debt instruments weighed against a finding of intent to create bona fide indebtedness, as did the lack of any repayment terms or guarantees.
Dufresne produced a list of payments to him that were purportedly made by another corporation employee to whom he said Browne wrote checks and who then deposited cash into Dufresne's bank account. However, the court held that this document was uncorroborated and Dufresne's testimony concerning it was self-serving and that there was no other evidence of repayment. And the court agreed with the IRS that the bank deposits were likely compensation for Dufresne's services to the corporation.
Finding the bank deposits to be unreported income to Dufresne and that the underpayments of tax were substantial within the meaning of Sec. 6662(d)(1)(A), and finding no persuasive evidence they were attributable to reasonable cause or that he acted in good faith, the court upheld the imposition of accuracy-related penalties as well.
- Dufresne, T.C. Memo. 2019-93
— By Paul Bonner, a JofA senior editor.