Attorney-at-Law

MR. REILLY’S CUP OF COCOA

In Uncategorized on 08/06/2019 at 16:18

The cliché would say “cup of tea” for my colleague, Peter Reilly, CPA, ace Forbes blogger and Section 183 maevin (please pardon arcane technical term), but Kent Alan Wegener and Shinae Wegener, 2019 T. C. Memo. 98, filed 8/6/19, fail both the Section 162 “ordinary and necessary business expense” and the Section 212 “activity engaged in for production of income” test. And with no income but a big loss, the Section 183 hobby loss rules don’t help, either.

Kent was a big-ticket executive, specializing in international finance. He got big-ticket deficiencies from trying to write off his investments in Ghanaian cocoa farms, and his “rescue” of African refugees from countries neighboring Ghana. See infra, as my high-priced colleagues say, for the reason for the quotation marks.

Kent took his hefty salary and a lot of his IRA squirrelings and lent same to various Ghanaian cocoa farmers, in the hope of being first repaid his capital and then splitting the profits fifty-fifty. Kent maintained these were loans to partnerships, as the farmers titled in their land, “improvements, unharvested crops, and inventories of salable farm products.” 2019 T. C. Memo. 89, at p. 5.

These were also foreign partnerships, if indeed they were what US law would so characterize. So TEFRA plays no role here. The issue is what Kent could deduct, not anything to do with the “partnerships.”

Now my hip readers say, “But Kent was here in the Land of the Free, at his big-ticket job. So where is ‘continuous, regular, extensive activity’?”

Judge Goeke has the same question.

“Petitioner has not established that he was sufficiently regularly and actively involved in cocoa farms’ operations for it to constitute a trade or business, and it seems improbable that he could have been, given the fact that the farms were across the world and he worked full time as a vice president….  Rather, he made financial investments in the farms to acquire half of the farmers’ assets and lent money to the farmers.  Under the partnership agreements, he received 50% ownership of the land and other assets and the right to 50% of future profits.  He invested in farms that were unable to pay their expenses and did not have sufficient funding to harvest their current crops.  He believed that with better management the farms could be profitable.  The farmers continued to manage the day-to-day operations, but the farms also engaged a business manager often chosen by petitioner.  Petitioner’s limited involvement in the farms, primarily wiring money to individuals in Ghana, does not rise to the level of the regular and active involvement required to establish a trade or business and deductible business expenses under section 162.

“Even if petitioner could establish that his activities constituted a trade or business, he has another problem.  He stated that the bulk of his deducted expenses were in fact loans that he expected to be repaid.  Transfers made with the expectation of repayment are loans, and we have repeatedly held that they are not deductible business expenses. This is true even where the prospect of repayment is doubtful.  Therefore, even if petitioner had established a trade or business, he would not be entitled to deduct the loans under section 162.” 2019 T. C. Memo. 89, at pp. 14-15. (Citations omitted).

It doesn’t get better for Kent.

“Each of these factors weighs against petitioner with respect to both the farming and the rescue services.  He engaged in the activities primarily through email and online chat services.  He had no expertise in cocoa farming, helping persons immigrate, or transporting large sums of money into the United States.  His full-time job limited his ability to be regularly and actively involved in either activity.  The activities were structured so that he would have to invest minimal time and effort.  His contribution was almost exclusively financial.  He had no expectation that the farm’s real estate would appreciate in value.  He had no success at these or any similar activities; he had no income for the years at issue from these activities and no profit.  Petitioner had a substantial IRA and earned an annual salary of over $200,000.  It appears his finances suffered as a result of his activities; he reported over $500,000 in IRA and pension distributions for the years at issue.  Finally, the record suggests a personal relationship with some Ghanaian farmers, indicating elements of personal pleasure or recreation.  We find that petitioner did not engage in his cocoa farming or rescue service activities with the primary purpose and intent of making a profit.” 2019 T. C. Memo. 89, at pp. 18-19.

In fact, it gets even worse.

“Petitioner also deducted business expenses related to his purported rescue services on Schedules C for ‘monies spent to enter new line of business’ of $28,065 and $3,950….  The Ghanaian Government and the United Nations High Commission for Refugees (UNHCR) established refugee camps in Ghana for persons fleeing conflict and political turmoil in neighboring west African countries.  Persons representing themselves as diplomats or officials working with the UNHCR contacted petitioner online and asked him to help families from the refugee camps immigrate to the United States. Petitioner’s principal means of contact with these individuals was online.  He believed that the refugees were former members of an overthrown government or executives of a large diamond company.

“As part of the rescue services, the contacts represented to petitioner that the refugee families had substantial wealth and needed assistance with physically transferring their wealth to the United States.  The contacts further represented that petitioner would receive a substantial portion of the families’ wealth upon their immigration to the United States as compensation for his assistance.  Petitioner transferred his own money to his contacts for the purported purpose of paying the expenses incurred to physically transfer the refugees’ money to the United States through the delivery and consignment of metal trunks containing cash and/or other assets.  He received correspondence with letterheads from the U.S. Customs and Border Protection Services, the United Nations General Assembly, the U.S. Department of Homeland Security, various ministries within the Ghanaian Government, and airport security or storage facilities in California, among others.  He received certificates labeled as from the World Bank, the International Monetary Fund, and the Supreme Court of Florida, among others.  Petitioner never helped anyone successfully immigrate to the United States and did not receive any payment for his services or repayment of the amounts he had advanced.  Over the course of at least one year he received emails identifying a series of new obstacles to the delivery of the refugees’ money and seeking additional funds allegedly needed to overcome these obstacles to the delivery.” 2019 T. C. Memo. 89, at pp. 7-9.

I’ll let Judge Goeke characterize this “business.”

“He appears to be the victim of a scam.  We sympathize for his situation, but such activity is not a trade or business that gives rise to deductible expenses.” 2019 T. C. Memo. 89, at pp. 16-17.

Kent, meet Greg and Sue Raifman. Or see my blogpost “An Unerring Nose for Fraud,” 2/27/15.

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  1. The cocoa venture seems like capital investment with enough chance to be repaid, or at least that could be decided once the loans came due (if NONE were paid back, maybe it was just gifts to individuals).

    The scam, I find interesting, taxwise. I suppose tax law says that if I invest money in a venture from which I intend to make a profit, and the venture goes sour, I can’t deduct my loss, unless I make enough such ventures for it to be an ongoing business. What is the sense of that? It’s just as much a business venture if it’s one time as if it’s repeated, and I’d be taxed on any profit I made, so the tax treatment of gains and losses is asymmetric.

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  2. 26USC§165(c)(2) limits deductions for theft losses (which the “rescue” scheme clearly is) to “losses incurred in any transaction entered into for profit, though not connected with a trade or business,” Kent was pro se, so apparently didn’t raise that argument. With heavy-duty deficiencies at stake, I’m surprised he didn’t retain counsel.

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    • “I’m surprised he didn’t retain counsel.” Well, he believed the Nigerian Million Con, so he must be rather too self-confident, as well as a fool. I was amazed at reading The Informant that a smart executive would fall for that as late as 1995 or whenever it was, but he did!

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