A taxpayer cannot call money one thing when doing the deal and something else when filing the return. That is one of the useful reminders from Reed v. Commissioner, T.C. Memo. 2026-64 (Aug. 5, 2026). The taxpayers transferred about $811,000 from personal accounts to real estate project entities. The entities recorded almost all of the transfers as loans, but the taxpayers later tried to deduct substantial portions as business expenses, unreimbursed partnership expenses, or bad debts. The Tax Court rejected those theories and emphasized that taxpayers generally must accept the tax consequences of the form they chose.
The case also provides a familiar lesson about documentation. The taxpayers mixed personal and business funds and failed to maintain complete records for several activities. The court sustained most of the IRS adjustments, including significant disallowed deductions and unreported income determined through bank-deposit analysis. For practitioners, Reed is a useful reminder that careful documentation of whether an advance is debt, capital, or expense should occur when the transaction happens, not after an examination begins.
Tax Practitioner Planning
Paper the advance the day the money moves. When a client funds a venture, decide then whether it is a loan, a capital contribution, or a reimbursable expense, and make the books, the agreements, and the return all say the same thing, because the court will hold the client to the form chosen. Reed also shows the reach of the bank deposit method: commingled accounts invite the IRS to treat every unexplained deposit as income, and the burden of untangling falls on the client.
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