Money hits the business bank account. There is no contract, no promissory note, no invoice. Everyone involved knows what the money is for, and everyone assumes the paperwork will get sorted out later.
This happens all the time in deal-driven businesses. Two people who have worked together for years agree to fund a purchase. One wires the money. The other goes to work. Nobody stops to paper the deal because nobody expects it to fall apart.
Then it falls apart. Now the question is what that money actually was. If it was a loan, it is not income. If it was a deposit, it is not income. If it was neither, the person who took it in owes tax on every dollar.
The tax code answers that question by looking at one moment in time. Not what the parties later worked out. Not what they later signed. What did they owe each other on the day the wire landed?
Tunkl v. Commissioner, T.C. Memo. 2026-83, gives us an opportunity to consider that timing rule and why documents created after the fact rarely rescue the taxpayer.
Facts & Procedural History
The taxpayer was a broker. He ran his business as an S corporation that he owned outright, but he did business under his own name. There was no separate bank account for the trade name. Everything ran through the corporation’s account. He used that account for both business and personal expenses.
The taxpayer built a relationship with the owner of a well-known New York gallery. They had done thirteen deals together worth $100 million to $200 million. They almost never signed anything for these deals.
In late 2017 the taxpayer found a Picasso he believed he could buy for about $18 million and flip to a Swiss buyer at a profit. He could not fund the purchase himself. So he brought the gallery owner in. The deal was that the gallery would put up $16.5 million, the taxpayer would cover the rest, and the two would split the profit on resale. No contract. No note. Nothing in writing.
In early 2018 the gallery wired the $16.5 million to the corporation’s account. Around the same time, the taxpayer had a second deal running on a different painting, with a second installment of about $17 million coming due within days. He used the wired money to close that other deal instead. Nobody had told him he could not. There were no restrictions on the funds.
A few months later the Picasso deal fell through. The seller changed his mind. The taxpayer flew to New York to deliver the news and met with the gallery owner’s lawyers. He left having signed an agreement acknowledging roughly $44 million in debt across six paintings and plus a demand note promising to repay it without interest. He also signed, at the gallery owner’s request, an invoice for the $16.5 million that was created months after the wire and backdated to January.
The corporation never reported the $16.5 million as income. It reported an ordinary business loss for the year. The taxpayer picked up the tax loss on his personal return. The IRS audited the return and issued a notice of deficiency for over $5 million, and the taxpayer petitioned the U.S. Tax Court to contest it.
What Makes Money Income in the First Place?
Income tax starts with income. Section 61 says gross income means all income from whatever source derived, unless the law says otherwise. Courts have read that language broadly. This is not a new provision and not a new concept.
The working test is control. Money is income when the person who receives it has enough control over it that, as a practical matter, he gets real economic value from it. The courts have said that a taxpayer has dominion and control when he is free to use the funds at will.
This is a low bar. The money does not have to be profit. It does not have to be earned. It does not even have to be money the taxpayer expected to keep forever. If it is in his bank account and he can spend it, it is income unless something pulls it back out. This is also why IRS agents can adjust income based on bank deposits alone.
There are several common ways it gets pulled back out. The first is a deposit. The second is a loan. The third are gifts. These are treated as nontaxable because the recipient is holding someone else’s money or, with the gift, it is a non-taxable transfer. The taxpayer here argued for both deposit and loan.
Was It a Deposit?
For cash basis taxpayers, advance payments are income in the year received. Deposits are not. The difference between the two is not always obvious.
The courts largely settled the framework for deposits. The test for customer deposits being the economic equivalent of advance payments is determined by examining the relationship between the parties at the time of the deposit. The two factors that matter the most are whether the recipient is obligated to repay the amount and whether he is free to keep the money.
The test does not ask what the parties later agreed. It asks about the relationship on the day the money changed hands.
So back to this case. On the day the money was wired, the two men were not seller and customer. They were co-investors. The gallery owner was never going to buy the painting from the taxpayer. He was putting up capital for a joint purchase and resale, with the profits split on a formula. The taxpayer was not earning a commission on the deal. There was no sale to deposit against.
The court also pointed out the obvious. The taxpayer has kept the money. He repaid about $2.5 million of the roughly $44 million he acknowledged owing, and he offered nothing showing that any part of that payment went against the $16.5 million. The gallery had the contractual right to sue and never did. When a recipient can keep the money, it looks less like a deposit as time passes. So the court said no, to deposit.
Was It a Loan?
The loan argument is usually the stronger one, because loan proceeds are never income. The borrower takes on an offsetting obligation. So there is no accession to wealth.
But the obligation has to exist at the right time. The rule is that for disbursements to be true loans there must have been, at the time the funds were transferred, an unconditional obligation on the part of the transferee to repay and an unconditional intention on the part of the transferor to secure repayment. A conditional obligation to repay does not create a loan.
That is the entire fight in this case. Was there an unconditional duty to repay on the day of the wire, or did the duty only arise later when the deal collapsed?
The taxpayer testified there was always a duty to repay. The court did not believe him and said so bluntly, calling the testimony unreliable, unsupported and thoroughly unconvincing. The documentary record cut the other way. The backdated invoice said nothing about repayment. The email traffic between the parties described a profit split, not a debt. The gallery owner was not expecting his money back. He was expecting a share of the upside on resale.
The appellate court that would hear this case uses a seven-factor test for whether something is a bona fide loan. A note or other instrument, interest, a repayment schedule, collateral, actual repayments, a reasonable prospect of repayment, and whether the parties behaved like lender and borrower. On the day the money moved, this transaction had none of those. There was no note, no interest, no schedule, no collateral, and no repayment.
Can Documents Signed Later Fix the Problem?
So can documents signed after the fact fix the problem?
By the time the case reached trial, the taxpayer had plenty of paper. He had a signed agreement acknowledging the debt. He had a demand note. He had an addendum splitting the note into four smaller notes. He had an assignment of an equity interest in partial satisfaction. On any given day after the middle of 2018, he clearly owed the gallery the money.
None of it helped. The note was signed in June. The money arrived in January. In between, the funds were used to close an unrelated purchase the taxpayer could not have closed otherwise. That is dominion and control, and it happened before any obligation to repay existed.
The backdated invoice didn’t help either. Backdating a document to a date when nothing was owed does not create an obligation on that date. If anything, it hurt. The court treated the invoice as evidence that there was no contemporaneous paperwork to point to, and it noted that if repayment had always been part of the deal, the party who insisted on the backdated invoice would have said so in it.
What About JV – Partnership Treatment?
If you are reading this site, you are probably tax savvy and wondering what about JV – partnership status. If the two investors really were co-investors in a joint venture, the tax consequences might run through the partnership rules rather than through a simple receipt of income.
This is probably the right answer on these facts. They parties were likely co-venturers for profit. This may have been a viable option. The income received may have been a non-taxable contribution to the partnership, and the expenses may have needed to be allocated. The dealer’s lawyers may have considered this in papering the deal, but it is not disclosed in the court opinion.
The court flagged the possibility of this argument and then declined to decide it, because neither side raised it at trial or on brief. That is a reminder that arguments not made are arguments conceded. There are cases where a joint venture theory changes the answer, but you have to actually put it in front of the court.
The Takeaway
Money that comes in with strings attached is not income, but the strings have to be tied at the start. This case draws that line about as sharply as it can be drawn. The taxpayer received millions on a deal that everyone expected to close, spent it on something else, and ended up signing a note for it months later after the deal died. The court held the money was income when it arrived, because on that day nobody owed anybody anything and he was free to spend it at will. If you are taking in money you may have to give back, put the repayment terms in writing before the wire hits, not after the deal goes sideways. A note signed later proves you owe the money. It does not prove you always did.
There is a broader point in this for anyone who funds deals on a handshake. The tax consequences of a transfer are fixed when the transfer happens. Later documents can prove what the arrangement was, and a contemporaneous writing is the best proof there is. But a document created after the fact that changes the deal is not evidence of the original arrangement. It is a new arrangement. The first one was already taxed. If you are in this position, our tax attorneys can help you evaluate what the record actually supports before the IRS does it for you.
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