Steve Hamilton is a Tampa native and a graduate of the University of South Florida and the University of Missouri. He now lives in northern Kentucky. A career CPA, Steve has extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.
Friday, August 21, 2015
Difference Between An Advance And A Loan
remember when the Washington Redskins and the Miami Dolphins went to the Super
Bowl? It was 1983, and I was living in Florida at the time. I am pretty sure I
was rooting for the Florida team. The Redskins had a hard-charging fullback
named John Riggins. His nickname was “Diesel” and he scored a touchdown on a
forty-something yard run. Blocking for
him was (among others) George Starke, an offensive tackle. The Washington offensive linemen, the ones who block for the quarterback and running back, were known as The Hogs.
George Starke is second from the left.
very much on the backside of his career at that point. He shortly thereafter left
football and opened a car dealership in Maryland. He couldn’t help but notice
that the dealership had difficulty recruiting service technicians. He helped
establish a technical school to educate and train technicians. He also hoped
that - by providing a realistic hope for a better life – the school would also
help with the poverty and violence in the area.
eventually sold the dealership and cofounded the Excel Institute, a nonprofit program
that provided a two-year reading, writing, arithmetic and technical skills
curriculum. The program was free of charge, but one had to commit.
a salary and housing allowance, as well as a credit card. He would charge
business and personal expenses on the card. The personal charges were segregated
on the books and records. George discontinued any personal charges in 2006, and
from 2007 onward the only activity relating to the credit card was a payroll
deduction to repay the balance.
There was a change
in the Board, and Starke did not like the new direction of things. He stopped fundraising.
He left the Excel Institute altogether in 2010.
Excel put the
remaining balance due from George of $83,698 on a Form 1099, sent a copy to
George, a second to the IRS and figured that was that.
not include the $83 grand on his individual tax return, however.
noticed and insisted that George do so. George said no.
And off to Tax
Court they went.
tell me: do you think George has a prayer?
As you know, forgiveness of a loan triggers income. The tax issue
is whether these monies were ever a loan.
thought is: of course they were! Heck, he was paying it back, wasn’t he?
someone gives you money does not mean that there exists a loan. A loan implies
that both sides anticipate the monies will be repaid. It would also be swell if
there were some attention to the basic formalities, like perhaps a loan
agreement and repayment terms.
And – just to
dream – maybe interest could be charged on the whole affair.
There was no
loan agreement. Excel itself gave mixed messages to the Court on whether it
thought the monies were a loan. George told the Court that he never had any intention
of paying back the money, and that he thought the payroll deductions were for
health insurance or something like that.
If not a
loan, then what were the monies to George?
advances, akin to nonrecoverable draws.
more easily understood in a draw-against-commission environment. Draws are intended to
provide some predictable cash flow to the salesperson. Say that a salesperson
receives commissions, and against the commissions is a $5,000 monthly draw. There are two types of draws - recoverable and nonrecoverable. A nonrecoverable draw does not have to be paid back should a saleperson fail to meet quota. A recoverable draw does have to be paid back. Granted, a salesperson who fails on a continuous basis to meet quota would soon be unemployed, but that is a different conversation. For our purposes, the key is that a nonrecoverable draw represents income upon receipt.
Back to our
pulled his 2010 tax year.
no advances in the 2010 tax year.
received advances in 2006.
nothing to tax in 2010 because George received no monies in 2010.
should have pursued his 2006 tax year. They did not, nor could they under the statute
dismissed the case. George won. The IRS
I am curious
why the IRS even bothered. The only thing I can figure is that they were hoping
for a miracle play. Maybe like John Riggins running that football for a
touchdown in Super Bowl XVII with George Starke blocking for him.