Revenue – primary goal

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What is a loan? – what if recipient has no intention of repaying? what if funds are embezzled? Incentive to disguise income as a loan.

  • Embezzlement – James v. U.S. – are embezzled funds gross income in the year in which they are appropriated? Yes. Indictment dismissed though b/c statute requires “willful” evasion.

    • “Consensual recognition, express or implied, of an obligation to repay.”

    • Cf. Gilbert p.148

    • Subsequent repayment by embezzler will qualify for loss deduction under §165(a) and (c)(2) in the taxable year of repayment.

  • Contingent advances – Boccardo v. Commissioner – P is a lawyer who uses gross free contract (if you win, we get 33 1/3%, we pay court costs, if you terminate, must pay reasonable cost of services) Tax Court said costs paid are advances, not deductible. Appeals Court says, not so. These are ordinary expenses for a firm trying to make a profit like anyone else.

    • Net fee contract – different result, costs are not deductible– where firm explicitly agrees to pay all costs and client agrees that costs are to be repaid out of recovery.

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