Bail Bonds by Marvin Nelson, Inc., a Corporation v. Commissioner of the Internal Revenue Service

Bail Bonds by Marvin Nelson, Inc., appeals the tax court’s decision upholding the denial by the Commissioner of the Internal Revenue Service of certain tax deductions. We affirm.

BACKGROUND

Marvin Nelson was a bail bondsman licensed in the state of California. In 1969, Nelson became a tax planning client of Harry Margolis. Under Margolis’ guidance, Nelson’s business was incorporated as Bail Bonds by Marvin Nelson, Inc. (“Bail Bonds”). Nelson was Bail Bonds’ sole shareholder and president during the years at issue.

In devising tax planning for his clients, Margolis arranged a variety of transactions between entities controlled by or under the effective control of Margolis, and entities (such as Bail Bonds) set up by Margolis’ clients. The Margolis organization referred to these entities as “system entities” because of their involvement with the Margolis tax planning “system.”

Transactions between Margolis’ clients and the system entities were recorded in a “system account.” The account was an informal record of money paid into the system by the client, transactions undertaken with that money by the system entities, and money paid out of the system to the client. A “circulating”…