## Facts

- Clifton Stanley owned and operated Stanley & Associates, a sole proprietorship providing insurance sales, retirement advice, and real estate investment services.
- During the tax years at issue (2010 and 2011), Stanley obtained funds from multiple clients, friends, and acquaintances after offering attractive rates of return.
- Stanley represented that he would repay the advances, with interest, from proceeds of his insurance and real estate activities.
- Stanley executed 22 written instruments labeled as promissory notes: $302,000 total in 2010 and $399,000 total in 2011.
- The notes identified the lender, principal amount, interest rate (about 7% to 25%), term (about 6 to 24 months), and repayment terms.
- All but one note was unsecured.
- Stanley made interest payments; some were timely and others were late.
- When notes came due, some were repaid in full, while others were renewed or extended, with interest continuing to accrue.
- On his 2010 and 2011 federal income tax returns, Stanley did not report the amounts received as income, treating them as loan proceeds.
- The Commissioner issued notices of deficiency asserting the advances were taxable income rather than loan proceeds.
- Stanley petitioned the Tax Court for redetermination.

## Issues

1. Whether amounts Stanley received under promissory notes were excludable loan proceeds (reflecting bona fide indebtedness) or includible in gross income under I.R.C. § 61.
2. Whether the surrounding facts and the parties’ conduct showed a genuine debtor–creditor relationship, including an actual obligation to repay and a real expectation of repayment.
3. Whether Stanley carried his burden of proving the Commissioner’s deficiency determinations were erroneous.

## Decision

- The Tax Court ruled for Stanley on the income-characterization issue.
- The court held the promissory-note advances were bona fide loans rather than taxable income.
- The court rejected the Commissioner’s attempt to recharacterize the loan proceeds as gross income under § 61.

## Legal Principles

- Gross income under I.R.C. § 61 is broad, but genuine loan proceeds are not income because they are offset by an enforceable obligation to repay.
- Whether an advance is debt depends on objective facts showing a real debtor–creditor relationship, not merely the labels the parties use.
- In evaluating bona fide indebtedness, courts commonly consider documentation (e.g., notes), stated maturity dates, interest charges and payments, repayment history, renewals or extensions consistent with lending practice, security or creditor protections, and whether the parties behaved as borrower and lender rather than as participants in a disguised income arrangement.
- In deficiency cases, the Commissioner’s determination is generally presumed correct, and the taxpayer must prove entitlement to exclusion from income by showing the advances were true loans.

## Conclusion

Because Stanley documented the advances with promissory notes stating principal, interest, and repayment terms, made interest payments, and in many instances repaid or renewed the notes in a manner consistent with genuine lending, the Tax Court concluded the transactions reflected bona fide indebtedness and the proceeds were not taxable income under § 61.


Stanley v. Commissioner, T.C. Memo. 2003–97 (2003)