Submitted: October 8, 2014.
Appeal from The United States Tax Court.
For Larry Zavadil, Diane Zavadil, Petitioner - Appellants: Joshua Allen Dorothy, Joseph Arthur Nilan, Gregerson & Rosow, Minneapolis, MN.
For Commissioner of Internal Revenue, Respondent - Appellee: Robert William Metzler, Supervisory Attorney, Curtis Clarence Pett, Gilbert Steven Rothenberg, Senior Attorney, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC.
Before LOKEN, COLLOTON, and SHEPHERD, Circuit Judges.
COLLOTON, Circuit Judge.
Larry and Diane Zavadil and the Internal Revenue Service dispute the propriety of certain deductions that the Zavadils claimed on their personal tax returns in 2004 and 2005. The Service issued a notice of deficiency, and the dispute was aired in the United States Tax Court. The tax court ruled for the Zavadils in part and for the Service in part. The Zavadils appeal the adverse portion of the decision, and we affirm.
In 1981, Larry Zavadil organized American Business Forms, Inc., which did business as American Solutions for Business. American Solutions sold business supplies and promotional products. Zavadil was the sole owner of the company until 2000, when he sold it to an employee stock ownership plan. In exchange for all outstanding shares of American Solutions, the company provided Zavadil with a $28,760,000 note, payable with interest in twenty annual installments. Zavadil thereafter served without compensation as the company's chief executive officer and as a member of the board of directors.
In 2004 and 2005, Zavadil had a financial arrangement with American Solutions under which the company paid Zavadil's personal expenses and Zavadil later reimbursed the company by personal check. American Solutions recorded Zavadil's personal expenses on a ledger. To generate a ledger entry, Zavadil charged an item to his American Solutions credit card or instructed an employee to direct the finance department to issue a check. As a condition of extending credit to American Solutions, the company's creditors required that all ledger accounts, including Zavadil's, must be paid off at the end of each month. To comply, Zavadil reimbursed the company on a monthly basis by personal check.
At the end of certain months in 2004 and 2005, however, Zavadil's personal bank account had insufficient funds to reimburse American Solutions for the amount recorded on the ledger. For those months, Zavadil
and American Solutions employed a system of advances that allowed the ledger to reflect a zero balance at the end of the month. At the end of each month, Zavadil wrote a personal check to the company, and the company brought the ledger balance to zero. At the beginning of the next month, however, American Solutions advanced funds to Zavadil's personal bank account to cover some or all of the amount of the check, recorded the ...