Larry Zavadil v. Commissioner of IRS, 793 F.3d 866

Larry Zavadil sold his company, American Solutions for Business, in 2000 for a $28,760,000 installment note and thereafter served as unpaid CEO.
During 2004–2005 the company paid certain personal expenses for Zavadil, recorded them on a personal ledger, and Zavadil nominally reimbursed the company each month by personal check.
When Zavadil’s bank balance was insufficient, American Solutions advanced funds at the start of the following month, and cashed the prior month’s check, creating a circular flow for several months in 2005.
On their 2004–2005 returns the Zavadils claimed: charitable deductions (various months), $150,000 (2004) and $75,000 (2005) of nonpassive losses paid to National Business (alleged consulting), and $35,800 paid to Becky DePree (alleged death benefit).
IRS issued a notice of deficiency disallowing many of the charitable deductions and the other deductions; Tax Court allowed charitable deductions before July 2005 but disallowed later charitable deductions and both the DePree and National Business deductions.
The Eighth Circuit affirmed: it found no clear error in the Tax Court’s determinations that post‑June 2005 contributions were economically borne by the company, and that the other payments lacked proof of business purpose or ordinary-and-necessary character.

Issue	Zavadil's Argument	IRS's Argument	Held
Deductibility of charitable contributions (2004–2005)	Contributions are deductible because Zavadil was required to reimburse company and bore economic burden	Company advances in latter 2005 show company, not Zavadil, bore the economic burden	Deductions allowed pre‑July 2005 (reimbursed); disallowed July–Dec 2005 (no bona fide indebtedness shown)
Character of ledger advances (whether bona fide debt)	Ledger entries and past repayments, accountant testimony, and company knowledge of Zavadil’s note show obligation to repay	No written agreement, no interest, no collateral, no due dates; advances indicate company assumed burden	Court found no bona fide indebtedness for July–Dec 2005; finding not clearly erroneous
Deductibility of $35,800 to Becky DePree (§162 business expense)	Payment was a death benefit to protect/promote Zavadil’s business reputation and goodwill	Payment was personal/compensatory; no showing of primary business motive or direct nexus	Disallowed: taxpayer failed to prove payments were ordinary, necessary, or motivated by protecting business reputation
Deductibility of $225,000 to National Business (business expense)	Payments were compensation for consulting services to Zavadil’s other businesses	No credible evidence of services, amounts, or business purpose; only vague testimony	Disallowed: taxpayer failed to introduce credible evidence of nature/purpose and ordinary/necessary character

INDOPCO, Inc. v. Comm’r, 503 U.S. 79 (tax deductions are matter of legislative grace; burden on taxpayer)
Crain v. Comm’r, 75 F.2d 962 (contribution with borrowed money deductible in year paid)
Estate of Sachs v. Comm’r, 856 F.2d 1158 (economic substance controls characterization)
Rolwing‑Moxley Co. v. United States, 589 F.2d 353 (factors for bona fide indebtedness include written agreement, interest, collateral, due date)
Caligiuri v. Comm’r, 549 F.2d 1155 (same principles re: indebtedness)
Rife v. Comm’r, 356 F.2d 883 (debt characterization requirements)
Blodgett v. Comm’r, 394 F.3d 1030 (burden-shifting and credibility in tax proceedings)
Welch v. Helvering, 290 U.S. 111 (general rule denying deduction for payment of another’s business expense absent direct business nexus)