The Ledger Is the Structure.

Nine words. They cost the taxpayers most of a case. Reed v. Commissioner, T.C. Memo. 2026-64 (T.C. Aug. 5, 2026) (Toro, J.), Docket No. 13757-20, decision to be entered under Rule 155.

Reed is, on its face, a federal income tax decision about deductions and a rehabilitation credit — underreported income from various sources, deductions for payments and transfers, farmland lease payments and claimed interest, entitlement to a general business credit for 2012, and additions to tax and penalties. It is not an asset-protection case. No creditor appears in it; no trust is attacked; nobody argues alter ego. And yet it may be the most useful case of the year for explaining to a client why the entities on his organisational chart are not, by themselves, worth anything.

Because the Reeds had the structure. What they did not have was a ledger that agreed with it.

Scott Reed grew up around construction, worked at Arthur Andersen and Standard & Poor’s, consulted for the Navy on the disposal of closed bases, and then specialised in historic-rehabilitation real estate development. He formed Reed Realty Advisors, LLC — a single-member LLC he wholly owned, treated as a disregarded entity for federal tax purposes, with Mr. Reed as managing director. His wife, Dr. Stacy Reed, is a physician who eventually opened her own dermatology practice in Portland.

Through Reed Realty Advisors, Mr. Reed developed three projects relevant to the case: Main Street Lofts and K Lofts, both on Main Street in Little Rock, Arkansas, and TJ Tower in Birmingham, Alabama. Each was held in its own LLC. Each of those was reached through a further disregarded entity — Reed Property Group 3, LLC for Main Street Lofts; K Lofts Member One, LLC for K Lofts; Reed Property Group 5, LLC and TJ Manager, LLC for TJ Tower. The project LLCs were treated as partnerships. Outside investors came in alongside. Banks lent against the projects: $3,182,000 from Riverside Bank to Main Street Lofts under a construction loan agreement dated 22 July 2013, and $1,375,000 from IBERIABANK to K Lofts. Arkansas historic-rehabilitation tax credits, under Ark. Code Ann. § 26-51-2204, were in the capital stack.

Read that paragraph again as a planner would. Layered entities. Separate LLCs per project. Disregarded holding vehicles between the individual and the operating partnerships. Third-party investors. Institutional debt. On paper, this is a competently segmented structure — the kind of thing a client pays real money to have drawn.

Now the other half of the record. Reed Realty Advisors had its own bank account. But during the years at issue, Mr. Reed “also used the Reeds’ personal bank accounts for deposits and withdrawals related to Reed Realty Advisors.” He paid the project entities’ contractors, repairmen and landscapers out of personal accounts. In 2014 and 2015 he transferred roughly $811,000 from the couple’s own accounts into Main Street Lofts and K Lofts. Neither party ever put the complete books and records of Reed Realty Advisors into evidence.

The structure said one thing. The bank statements said another. When the two disagreed, the taxpayers lost.

For 2012, 2013 and 2014 the Commissioner ran a bank-deposit analysis and determined additional gross receipts. The Court had no difficulty accepting the method, quoting settled law: “A bank deposit is prima facie evidence of income and [the Commissioner] need not prove a likely source of that income.” Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); see Clayton v. Commissioner, 102 T.C. 632, 645–46 (1994). Once the Commissioner produced that minimal evidentiary foundation, the burden fell on the Reeds to show which deposits were not taxable. They largely could not — the Court found they had “failed to establish that any of the other deposits the Commissioner classified as unreported income were not taxable” — and the determinations were sustained.

That is the mechanism worth understanding. Commingling does not merely look untidy. It shifts who has to prove what. A deposit sitting in a personal account is presumed to be the owner’s income until the owner demonstrates otherwise, and the owner demonstrates otherwise with records.

The creditor-side analogue is exact. A claimant who can show that entity money and personal money ran through the same account does not have to prove very much more; the burden of explanation migrates to the person who mixed them. Separateness is not a status conferred by a filing receipt. It is a factual condition, evidenced daily, in the account statements.

The Reeds argued that their $811,000 of transfers into the project LLCs were deductible — as trade or business expenses of Reed Realty Advisors, or as unreimbursed partnership expenses, or as worthless debts under section 166. Every theory failed, and the Court framed why at the outset by quoting the Supreme Court: “while a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not.” Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974).

What form had the Reeds chosen? Their own bookkeepers had answered that question years earlier. Main Street Lofts recorded the incoming money by increasing an account titled “Scott Reed Float Loan.” K Lofts recorded it in accounts titled “Scott Reed Short Term Loan” and “Scott Reed Long Term Loan.” The entities had booked the money as debt owed back to Mr. Reed — and some of it was in fact repaid during 2014, decreasing the loan account balances. As the Court put it, the Reeds “offered no persuasive explanation for why the project entities treated most of Mr. Reed’s transfers as loans if they were not reimbursable.”

So the transfers were loans or capital contributions, not expenses. Loans are not deductible. And to deduct them as worthless debts under section 166 and Treas. Reg. § 1.166-9, the Reeds needed to show worthlessness in the years at issue, which they could not: the projects might yet have rented or sold their buildings, and after the years at issue Mr. Reed exchanged his K Lofts units for an interest in the acquiring entity — hardly the act of a man who had abandoned hope of repayment.

The Court’s summary of the position is quietly devastating: “we find ourselves back where we started. The Reeds appear to have made capital contributions or loans to the project entities. If the Reeds’ transfers were capital contributions, they are not entitled to deductions for them. If they were loans — as Main Street Lofts’ and K Lofts’ accounting treatment would suggest — then the Reeds have not established that they were worthless.”

This is the point clients find hardest, and it is the one this series returns to constantly. A structure is a set of commitments, and the commitments run in both directions. Clients want the LLC respected when a creditor arrives and disregarded when respecting it is inconvenient. Courts do not permit the switch. The party asking a court to look past the chosen form is the party carrying the burden — and in Reed that party was the taxpayer, defeated by his own general ledger.

Mr. Reed paid contractors, repair and landscaping costs at the projects. The Court applied the general rule that “[a] taxpayer generally may not deduct the payment of another person’s expenses,” see Deputy v. du Pont, 308 U.S. 488, 494–95 (1940), and Welch v. Helvering, 290 U.S. 111, 114 (1933), and considered the narrow exception of Lohrke v. Commissioner, 48 T.C. 679, 688 (1967), which requires that the taxpayer’s primary motive be protection of his own business. The Reeds failed the first prong.

The evidence that sank them was their own stipulation: for each historic development project, “[t]he costs of the acquisition, contractors, and construction were to be borne by the respective LLC.” The governing documents allocated those costs to the entities. Mr. Reed paid them anyway. The Court also noted that he was an investor in the projects, which cast doubt on the claim that any benefit to the project entities was “merely incidental” to some separate business purpose of his own.

And in a footnote about the largest single transfer, $200,000 sent to K Lofts after a wall collapsed, the Court reduced the whole problem to one line: “under the Reeds’ view of the facts, the Reeds did not pay an expense for K Lofts—they paid K Lofts itself.”

That sentence is the whole doctrine of entity separateness in eleven words. Money given to an entity is capital. Money paid for an entity is somebody else’s expense. Either way it is not yours to deduct — and either way, the transaction is evidence about how seriously you treat the boundary you asked the law to respect.

The Reeds’ documentary problems were not incidental; they were the case.

On basis, Mr. Reed testified that his capital account was about $425,000 and his share of partnership liabilities about $700,000, giving roughly $25,000 of basis per unit across 45 units. The Schedule K–1 contradicted him: it reflected an ending capital account of $425,020 and a liability share of $298,791 — which works out to $16,085 per unit against a $17,000 sale price, that is, gain rather than the claimed $125,000 loss. See I.R.C. §§ 705, 722, 741, 752; Treas. Reg. §§ 1.741-1(a), 1.705-1(a)(1). Worse, the K–1 was prepared after year-end and did not show the order of contributions, distributions and liability changes during 2013, so it was impossible to fix basis as of each sale date. The Court declined to make a Cohan estimate, observing that on this record allowing one “would be in essence to condone the use of that doctrine as a substitute for the burden of proof.” Coloman v. Commissioner, 540 F.2d 427, 431–32 (9th Cir. 1976); cf. Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930).

On the K Lofts books, a $200,000 entry appeared in a general ledger printed in 2018 after a successor had taken over and renamed the property, labelled “Endurance” rather than with Mr. Reed’s name, with the offsetting credit in an expense account called “Loss From Property Damage” — a pattern consistent with an insurance recovery, not a member advance.

And on the briefing, the Court recorded that the taxpayers’ opening brief “repeatedly cites pages in the record and transcript that do not support the propositions for which they are cited as well as exhibits that were not introduced into evidence,” before invoking the Supreme Court’s reminder that “judges are not like pigs, hunting for truffles buried in the record.” Murthy v. Missouri, 144 S. Ct. 1972, 1991 n.7 (2024). Several issues — 2014 rental income, a $27,215 interest deduction, the $99,800 rehabilitation credit, and the late-filing additions to tax — were treated as abandoned because they were never argued. See Mendes v. Commissioner, 121 T.C. 308, 312–13 (2003).

The Reeds filed all four returns late, and remain liable for section 6651(a)(1) additions and, if the Rule 155 computations confirm a substantial understatement, a section 6662 accuracy-related penalty; the Commissioner had properly obtained supervisory approval under section 6751(b)(1), the Civil Penalty Approval Form having been signed by the examining agent’s supervisor on 29 November 2016. See Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1072–74 (9th Cir. 2022).

It would be wrong to read Reed as a case where nothing worked. The Reeds won precisely where the record supported them, and the pattern is instructive.

They won a $40,000 item, because Mr. Reed testified credibly and unrebutted that the money was an advance from a friend for due-diligence expenses on a Baton Rouge building, and because he had not also deducted the expenses it covered. They won a $50,000 farm rent deduction on his unrebutted testimony about an oral lease, where the Commissioner offered assertion in a brief instead of evidence — “the Commissioner’s assertion on brief that the landowner once made a statement about the fair market value of leasing the property is not evidence.” See I.R.C. § 162(a)(3); Treas. Reg. § 1.162-11(a); Niedringhaus v. Commissioner, 99 T.C. 202, 214 n.7 (1992). They won the whole of Appendix A — payments to land use consultants, law firms and named contractors — because Mr. Reed “credibly testified as to the nature of these expenses and their relationship to Reed Realty Advisors’ activities,” and because the Commissioner could not show the project entities’ books treated those payments as reimbursable. And they defeated the Commissioner’s late attempt to increase the gain and recharacterise it as short-term, because on those issues he bore the burden under Rule 142(a) and had not met it; the $108,526 net long-term capital gain in the Notice of Deficiency was sustained.

Every one of those wins came from the same source: a coherent account of a transaction that the documents did not contradict. Every loss came from the opposite. The decision is not about aggression versus caution. It is about proof.

• Separateness is a bank-account fact, not a filing fact. An entity you fund and pay from personal accounts is an entity whose separateness you will have to prove later, against a presumption running the other way. Operate every entity through its own account, and reconcile it.
• The ledger is the structure. “Scott Reed Float Loan” was, in the end, the most consequential document in this case. Whatever your books call a transaction is what a court will most likely call it. If money into an entity is meant to be capital, book it as capital; if it is a loan, paper it, price it, and service it.
• The form binds you as well as your adversary. Choose the structure deliberately and then live inside it. A client who wants an entity respected against a creditor cannot treat it as a personal chequebook in the meantime — and the record of that treatment is created years before anyone looks at it.
• Keep financing-dependent ventures on their own side of the wall. A leveraged, speculative operating venture is an activity to be walled off from the protected estate, not run through it. Where the planning objective is to keep one spouse’s professional earnings clear of the other’s venture risk, the venture belongs in its own segregated structure from the outset — capitalised once, deliberately, and thereafter funded from its own resources rather than from the household’s.
• Contemporaneous records are the asset. Basis, ordering, purpose, authority: reconstruct any of these years later and you are relying on testimony against your own paperwork. Cohan is not a plan.
• Unargued is lost. Issues not addressed are abandoned, and record citations that do not support the point cost credibility on the points that might have.

This series argues that protection must be seasoned, irrevocable and discretionary, and independently administered. Reed adds the requirement that makes those three enforceable in practice: it must be actually observed. A trust administered by a genuinely independent trustee who nonetheless papers whatever arrives, or an LLC whose obligations are met from the member’s personal account, has the form of protection and not the substance. Nothing in a creditor contest, an alter-ego argument or a fraudulent-transfer analysis punishes a family more reliably than a set of entities that the family itself did not respect.

The Reeds built the structure. They did not keep the record that proved it was real. The distance between those two facts, measured in four years of disallowed deductions, a disallowed credit, additions to tax and a probable accuracy-related penalty, is the whole lesson.

Build it early. Fund it correctly. And then run it the way you told the world it was run. This note is general commentary on a published decision and is not legal or tax advice for any particular person, entity or structure; outcomes turn entirely on the facts and on the law of the relevant jurisdictions, and any specific situation should be assessed with qualified counsel.