## Facts

- Philip Long filed a 2006 federal income tax return reporting $0 taxable income.
- The IRS issued a notice of deficiency asserting Long had $4,145,423 in taxable income and $1,430,743 in tax liability for 2006.
- Long, proceeding pro se, petitioned the U.S. Tax Court for redetermination, disputing the IRS’s calculations of gross receipts, costs, and deductions.
- Long operated a real-estate development business connected to a planned condominium project; he also held an option/contractual interest related to land and became a plaintiff in litigation after the counterparty terminated the arrangement.
- In 2006, Long received $5.75 million for assigning his position as plaintiff in that lawsuit and reported the amount as long-term capital gain.
- Long also claimed a $600,000 payment to Steelervest, Inc. as a deductible business expense and sought additional deductions for alleged unaccounted legal fees.
- After trial on stipulated facts and exhibits, the Tax Court treated the $5.75 million as ordinary income, disallowed the $600,000 deduction, and denied additional legal-fee deductions for insufficient proof.
- Long appealed those determinations to the Eleventh Circuit.

## Issues

1. Whether the $5.75 million received for assigning Long’s position as plaintiff in the lawsuit was long-term capital gain from the sale of a capital asset or taxable ordinary income as a substitute for business income.
2. Whether Long proved that the $600,000 payment to Steelervest, Inc. qualified as an ordinary and necessary business expense deductible under I.R.C. § 162.
3. Whether Long substantiated additional deductible legal fees beyond those allowed, such that the Tax Court erred in denying further deductions.

## Decision

- The Eleventh Circuit affirmed the Tax Court in full.
- The court held the $5.75 million was ordinary income because it functioned as a lump-sum substitute for anticipated income from Long’s development activities, not proceeds from disposition of a capital asset.
- The court upheld disallowance of the $600,000 Steelervest payment because Long did not carry his burden to establish deductibility.
- The court upheld denial of additional legal-fee deductions because Long failed to substantiate the claimed amounts, and the Tax Court’s finding of insufficient evidence was not clearly erroneous.

## Legal Principles

- Lump-sum amounts received in place of expected ordinary business profits are generally taxed as ordinary income, even if received through an assignment or sale of a claim or contractual position.
- Capital-gain treatment requires disposition of a “capital asset” within I.R.C. § 1221; rights closely tied to the production of ordinary business income may be treated as ordinary-income interests rather than capital assets.
- Deductions are matters of legislative grace, and the taxpayer bears the burden to prove entitlement and proper substantiation, including for business expenses under I.R.C. § 162 and for claimed legal-fee deductions.
- On appeal, the Tax Court’s factual findings are reviewed for clear error; failure of proof supports affirmance of disallowed deductions.

## Conclusion

The Eleventh Circuit affirmed the deficiency determinations because the $5.75 million payment was a substitute for ordinary business income and because Long did not substantiate either the claimed $600,000 business-expense deduction or additional legal-fee deductions.


Long v. Comm’r, 772 F.3d 670 (11th Cir. 2014)