A Promise Is Not a Contribution.

Twelve years later, on October 7, 2026, the United States Tax Court told Mr. West what those documents were worth to him for tax purposes. The answer was nothing. Judge Gustafson held that Mr. West’s basis in the partnership was zero, that a claimed 2016 partnership loss of $6,894,774 was therefore not deductible, and that the carryback of that loss to 2015 failed with it (Id.).

West v. Commissioner is a tax case, and a memorandum opinion at that, which means it applies settled law rather than making new law. It belongs in the Watchtower anyway, because the mistake at the centre of it is one we see well outside the tax return. Mr. West treated a promise to pay as though it were a payment. Partnerships, limited liability companies and trusts are all funded on the same assumption more often than their owners realise, and courts of every kind respond to it the same way.

The facts, as reported in the published analysis of the opinion, are these (Ed Zollars, “Substantiation, Partner Basis, and Methodologies: An Analysis of West v. Commissioner,” Current Federal Tax Developments (Oct. 7, 2026), from which the facts, figures and holdings described in this note are taken; the caption, docket number, judge and date are taken from the Tax Court’s public docket). Mr. West managed Mr. Quintanilla’s business interests under a 2011 employment agreement. In 2014 the two formed what the court called the Commodities Trading Partnership under a Commodity Trading Allocation Agreement. Profits and losses were to be split evenly. Because Mr. West had contributed no capital, the agreement dealt with his half of any loss by a bookkeeping device: at each year-end, his share of the loss was treated as borrowed from Mr. Quintanilla under the note.

The partnership traded for about twenty-six months and was wound up on February 26, 2016. It lost $13,729,319 in 2014, made $2,563,150 in 2015, and lost a further $148,902 in the first weeks of 2016. Net, it lost a little over $11.3 million, of which Mr. West’s half was about $5.66 million. Mr. Quintanilla claimed the whole of the 2014 loss on his own return.

Two later events matter. In March 2015, Mr. West sold roughly $4.5 million of his own and his companies’ assets to Mr. Quintanilla. He was not paid in cash; the price was applied to Mr. West’s other liabilities, including a $2.2 million note he owed to his former wife. The sale agreement said nothing about the trading partnership or the note. Then, in December 2021, a state court in Bexar County, Texas, held that Mr. West still owed Mr. Quintanilla $5,878,127 on the note and that the 2015 sale had not discharged it.

So by the time the Tax Court heard the case, Mr. West had a real debt, confirmed by a judgment, arising from real trading losses. What he did not have was a deduction.

A partner may deduct his share of partnership losses only up to his basis in his partnership interest. The Code says a loss “shall be allowed only to the extent of the adjusted basis of such partner’s interest in the partnership” at the end of the year in which the loss arose (I.R.C. § 704(d)(1)). Basis in turn starts with what the partner actually put in: money, and the adjusted basis of property contributed (I.R.C. § 722).

Mr. West had put in neither. His argument was that the $5 million note stood in for the capital he had not contributed. The Tax Court has heard that argument before and has rejected it consistently. A person has no cost in his own promise to pay, so a partner who contributes his own note has contributed something with a basis of zero. The court relied on VisionMonitor Software, LLC v. Commissioner, a 2014 memorandum decision to that effect, and the full Tax Court restated the rule earlier this year in Continental Grand Limited Partnership v. Commissioner (VisionMonitor Software, LLC v. Commissioner, T.C. Memo. 2014-182; Continental Grand Limited Partnership v. Commissioner, 166 T.C. No. 3 (2026) (partnership took a zero basis in a note treated as contributed by its maker, and the contributing partner took a zero basis in its partnership interest)).

Mr. West’s position was weaker than the usual one, because his note was not even payable to the partnership. It ran to Mr. Quintanilla personally. Whatever it was, it was not a contribution to the venture whose losses he wanted to deduct.

Three further doors were closed in turn.

The debt rules. A partner’s basis can include a share of the partnership’s own liabilities. The regulations that allocate those liabilities, however, disregard a partner’s promissory note unless it is “readily tradeable on an established securities market” (Treas. Reg. § 1.752-2(h)(4)). A private note between two business associates is not.

The at-risk rules. Separately from basis, section 465 limits losses to the amount a taxpayer has at risk in the activity. Borrowed money can count, but not when it is borrowed from someone who holds an interest in the activity other than as a creditor (I.R.C. § 465(b)(3)(A), (B)). Mr. Quintanilla was a fifty-percent partner. Money deemed borrowed from him could not put Mr. West at risk.

The 2015 sale. Mr. West suggested that the assets he sold to Mr. Quintanilla should be treated as repayment that restored his basis. The court treated the sale as what its own documents said it was: a separate transaction that made no reference to the partnership or the note. The state court had already reached the same view of it.

The statute does provide a route back. A loss disallowed for want of basis is carried forward and allowed when the excess is repaid to the partnership (I.R.C. § 704(d)(2)). The rule rewards money that actually moves, in the year it moves, and nothing short of that.

It would be easy to file West under “partnership basis” and forget it. We think the better reading is broader.

An entity is only as real as what has been put into it. A capital account that consists of the member’s own unpaid note is an entry in a ledger. When a tax examiner looks at it, the entry supports no deduction. When a creditor’s lawyer looks at a company or trust that was “funded” the same way, the entry supports a different argument: that nothing was ever truly parted with, and that the structure is the owner by another name. The legal tests differ. The instinct behind them is the same, and it is a sound one. Courts want to see what moved, when, and to whom.

That is the reason the structures we administer are funded with assets that are actually transferred, at a time when the settlor has no claim against him, to a trustee who is independent of him. A completed transfer leaves a record that explains itself. A promise to transfer, or a loan from the person on the other side of the deal, leaves a record that someone will later have to argue about.

West also shows how little weight a court gives to a story told after the fact. The 2015 sale agreement did not mention the note. Years later Mr. West asked two courts to read it as though it had. Neither would. Documents drafted between people who trust each other tend to leave out exactly the term that matters once they stop trusting each other, and a court will not supply it for the party who wishes it had been written down.

The opinion carries a second, quieter lesson, and for our clients it may be the more practical one.

Mr. West’s finances were closely bound up with his employer’s. According to the published analysis, Mr. Quintanilla’s accountants ran a centralised bill-paying system that handled expenses for Mr. West and his companies alongside those of the Quintanilla businesses, charging them back through intercompany invoices (Zollars, supra). While the relationship was good, this was presumably convenient. When it ended, the person who needed the records to prove his deductions was not the person who held them.

The consequences run through the rest of the decision. The IRS reconstructed Mr. West’s 2015 income from his bank deposits and the court sustained $162,091 of unreported receipts. Roughly $1 million of business deductions had been disallowed, and most stayed disallowed. Travel expenses, including private aircraft and helicopter flights, failed for want of contemporaneous logs showing business purpose; the familiar rule that lets a court estimate an expense the taxpayer plainly incurred does not extend to travel, which Congress has made subject to strict substantiation (I.R.C. §§ 6001, 274(d); Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930)). Payments between Mr. West’s own entities were shown to have moved from one of his pockets to another without any deductible expense being established. Spreadsheets and several hundred pages of documents offered for the first time with the post-trial briefs were not considered, because evidence has to be introduced at trial.

Mr. West asked to be excused from the twenty-percent accuracy-related penalties on the ground that he had reasonable cause: a hostile former partner, subpoenas that went unanswered, boxes of documents the IRS would not review. The court was not persuaded, and the penalties stand for both years (I.R.C. §§ 6662(a), (b)(2), 6664(c)(1)).

We draw no conclusion about who was at fault for the state of the records, and the opinion does not need one. The planning point is structural. Anyone whose records are kept by a counterparty is dependent on that counterparty’s goodwill for exactly as long as it lasts. Independent administration is usually discussed as a defence against the charge that a settlor controls his own trust. It has a plainer benefit as well. An independent administrator keeps a complete set of books that belongs to the structure, not to whoever is on the other side of its transactions, and those books are still there when a revenue authority or a court asks for them.

A few points are worth carrying away, none of them specific to commodities trading.

• Ask what actually went in. For any partnership or LLC interest, the useful question is how much money or property has been contributed, not what the operating agreement recites or the capital account shows. Where the answer is “a note,” the tax position and the credibility of the structure both deserve a second look.
• A loan from a co-owner is not the same as a loan from a bank. The at-risk rules treat the two differently, and so, in practice, does a court deciding whether a transaction had substance.
• Say in the document what the payment is for. If a transfer is meant to repay a particular obligation, the instrument should say so on the day it is signed. A later explanation is an argument; a contemporaneous recital is evidence.
• Keep your own records, or have someone independent keep them. Deductions, basis and the legitimacy of a structure are all proved from paper, and the burden generally falls on the person claiming the benefit.

The decision is to be entered under Rule 155, so the final figures are still to be computed, and the usual appeal period has not run (West, T.C. Memo. 2026-105 (decision to be entered under Rule 155)). The principle is not in doubt. Mr. West ended with a judgment debt of nearly $5.9 million for trading losses and no deduction for any of it, because the only thing he ever contributed was his word that he would pay later.

This note is general information, not tax or legal advice. How basis, at-risk and substantiation rules apply to any particular interest depends on its facts and should be reviewed with qualified advisers.