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Petitioner has failed to establish that the open transaction
doctrine is applicable. Petitioner, on brief, contends that he
loaned over $334,500 to M&L. This contention is based primarily
on petitioner's testimony, which was vague, evasive, and
otherwise unpersuasive. In an attempt to corroborate this
testimony, petitioner presented scant and dubious documentation.
Even if petitioner could establish that he loaned M&L these
funds, the open transaction doctrine is not applicable, because
petitioner did not have the requisite uncertainty relating to the
recovery of his principal. Indeed, petitioner routinely received
monthly payments from M&L and reinvested them in the company.
Moreover, he encouraged friends and family to make investments in
M&L.
Petitioner also contends that the payments he received from
M&L should be treated as a return of principal because they were
made to conceal a fraud. Petitioner relies on Greenberg v.
Commissioner, T.C. Memo. 1996-281. In Greenberg, the taxpayers
transferred funds to a ponzi scheme that purported to be a
legitimate mortgage company. The taxpayers were passive
investors and were paid monthly payments from the company's bank
account. The Court was presented with sufficient evidence to
determine the amount of funds paid and received by the taxpayers,
and it held that the payments the taxpayers received were not
interest because they were not compensation for the use or
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