Tunkl v. Commissioner, T.C. Memo. 2026-83 (Sept. 10, 2026)

For federal income tax professionals advising high-net-worth clients, dealers, and corporate entities engaged in informal joint ventures, the line separating taxable gross income from nontaxable receipts—such as deposits or bona fide loans—is a critical compliance boundary. In Tunkl v. Commissioner, T.C. Memo. 2026-83 (Sept. 10, 2026), the United States Tax Court addressed whether $16.5 million received by an art dealer’s S corporation for an intended artwork acquisition constituted unreported gross income under Internal Revenue Code (IRC) § 61(a) or a nontaxable financial flow.

The decision by Judge Landy offers an instructive analysis of the economic dominion doctrine, the strict temporal requirements for establishing customer deposits under Commissioner v. Indianapolis Power & Light Co., and the Ninth Circuit’s multifactor framework for bona fide debt under Welch v. Commissioner.

Factual Background

David T. Tunkl has operated as an art broker for over 45 years. During 2018, the taxable year in issue, Mr. Tunkl was the sole shareholder of Ganymede International, Inc. (Ganymede), an S corporation organized in 2014. Although Mr. Tunkl conducted business informally under the trade name “David Tunkl Fine Art,” that entity maintained no separate bank account. All business proceeds were deposited directly into Ganymede’s JPMorgan Chase bank account, which Mr. Tunkl routinely used for both corporate and personal expenses.

Mr. Tunkl maintained a long-standing business relationship with Robert Mnuchin, founder of the Mnuchin Gallery, LLC (Gallery) in New York City. Prior to 2018, the parties had completed 13 major transactions totaling between $100 million and $200 million. Reflecting industry practice and their mutual trust, Mr. Tunkl and Mr. Mnuchin rarely executed formal written contracts for their transactions.

In late 2017, Mr. Tunkl identified an opportunity to purchase Pablo Picasso’s painting Man with Ice Cream Cone (Picasso painting) from a third-party dealer for $18.5 million. Mr. Tunkl believed he could immediately resell the painting to a prospective Swiss buyer for $30.5 million (or $18.5 million in cash plus a Jean Dubuffet painting valued at $13 million), yielding a substantial profit. Lacking the requisite capital, Mr. Tunkl invited Mr. Mnuchin to join the deal as a co-investor. As the court observed, “Mr. Tunkl testified that the transaction was a ‘connected deal’; Mr. Mnuchin was an investor who never intended to purchase the Picasso painting for his own use, and both parties understood the transaction to be a joint venture designed to make a profit”.

Under their oral agreement, Mr. Mnuchin agreed to contribute $16.5 million, Mr. Tunkl agreed to supply the remaining $2 million, and net profits were to be split 75% to Mr. Mnuchin and 25% to Mr. Tunkl on the first $30 million, with additional profits divided equally. On January 11, 2018, the Gallery wired $16.5 million to Ganymede’s JPMorgan Chase bank account. Critically, “Mr. Mnuchin did not place any specific restrictions on Mr. Tunkl’s use of the $16.5 million at the time the money was wired to Ganymede”.

Simultaneously, Mr. Tunkl was negotiating the purchase of Francis Bacon’s painting Figure Turning (Bacon painting) for $21.85 million through a Belizean gallery. Ganymede had paid an initial installment of $4.4 million in August 2017 and faced a strict deadline of January 10, 2018, to pay a second installment of $17.45 million. Failure to make the second payment meant default and the forfeit of the $4.4 million as liquidated damages.

On January 16, 2018—five days after receiving Mr. Mnuchin’s $16.5 million—Ganymede wired $17.4 million to a Swiss bank account to complete the Bacon painting purchase. Because Mr. Mnuchin placed no restrictions on the wired funds, Mr. Tunkl utilized Mr. Mnuchin’s capital to cover Ganymede’s Bacon painting commitment, anticipating that incoming commissions from other pending art sales would cover his obligations to Mr. Mnuchin if the Picasso deal faltered.

By late April 2018, the Picasso painting owner refused to sell, and the deal collapsed. Unable to return the $16.5 million, Mr. Tunkl met with Mr. Mnuchin in New York in June 2018. Mr. Mnuchin’s legal counsel presented Mr. Tunkl with an Agreement and Demand Note dated June 14, 2018, reflecting an aggregate personal indebtedness of $44 million across six unconsummated art deals. Under the Demand Note, Mr. Tunkl promised to repay $44 million “on demand without interest”. The note contained no maturity date, no fixed repayment schedule, and required no collateral.

In December 2018, an Addendum severed the $44 million liability into four separate notes, isolating the $16.5 million Picasso painting obligation. In June 2019, Mr. Tunkl assigned an equity interest in a U.K. entity valued at $2.5 million to Mr. Mnuchin—the sole payment ever made toward the $44 million debt. Neither Mr. Mnuchin nor the Gallery ever instituted civil litigation to enforce collection.

On its 2018 Form 1120S (U.S. Income Tax Return for an S Corporation), Ganymede reported an ordinary business loss of $1,696,516, omitting the $16.5 million receipt entirely. Mr. Tunkl reported the flowthrough S corporation loss on Schedule 1 of his 2018 Form 1040. Following an audit, the Commissioner issued a Notice of Deficiency determining a federal income tax deficiency of $5,142,307 for 2018.

Taxpayer Positions and Request for Relief

Before the Tax Court, Mr. Tunkl sought redetermination of the deficiency. Although his petition raised a statute of limitations defense under IRC § 6501(a), Mr. Tunkl conceded at trial that the Notice of Deficiency was timely issued.

On the merits, Mr. Tunkl requested complete relief from the deficiency based on two alternative characterizations of the $16.5 million receipt:

Nontaxable Customer Deposit: Mr. Tunkl argued that the $16.5 million constituted a customer deposit received from Mr. Mnuchin to acquire artwork, which under Supreme Court precedent is excluded from gross income.
Nontaxable Loan Proceeds: Alternatively, Mr. Tunkl contended that the $16.5 million constituted bona fide loan proceeds accompanied by an obligation to repay, as later memorialized in the June 2018 Demand Note.

The Court’s Legal Framework

Judge Landy’s opinion begins by establishing the procedural burden of proof and the substantive tax statutory standards governing income realization.

Burden of Proof in Unreported Income Proceedings

Under Tax Court Rule 142(a)(1) and Welch v. Helvering, 290 U.S. 111, 115 (1933), the Commissioner’s deficiency determination is presumed correct. In cases involving unreported income, the Ninth Circuit (to which an appeal would lie under IRC § 7482(b)(1)(A)) requires the Commissioner to establish “some evidentiary foundation” connecting the taxpayer with the income-producing activity (Weimerskirch v. Commissioner, 596 F.2d 358, 361–62 (9th Cir. 1979); Edwards v. Commissioner, 680 F.2d 1268, 1270–71 (9th Cir. 1982)). The Commissioner readily satisfies this threshold requirement by demonstrating actual receipt of funds (Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999)).

Because Ganymede’s bank records stipulated the receipt of the $16.5 million wire on January 11, 2018, the Commissioner met his initial burden. Furthermore, because Mr. Tunkl failed to establish that the burden shifted under IRC § 7491(a), the burden rested entirely on Mr. Tunkl to prove by a preponderance of the evidence that the determination was erroneous.

Gross Income and the Economic Dominion Standard

Under IRC § 61(a) and Treas. Reg. § 1.61-1(a), gross income extends to “all income from whatever source derived,” encompassing all accessions to wealth unless specifically excluded by statute (Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429–31 (1955)). Realization occurs when the taxpayer gains practical control over funds:

“A gain ‘constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it.’” James v. United States, 366 U.S. 213, 219 (1961) (quoting Rutkin v. United States, 343 U.S. 130, 137 (1952)).

A taxpayer exercises dominion and control when free to use funds at will (Rutkin, 343 U.S. at 137). Under cash-method accounting principles (Treas. Reg. § 1.451-1(a)), advance receipts are includable in gross income upon receipt unless a recognized statutory or judicial exclusion applies.

Customer Deposit Jurisprudence

In distinguishing taxable advance payments from nontaxable customer deposits, the Tax Court relied on Oak Indus., Inc. v. Commissioner, 96 T.C. 559 (1991) and the Supreme Court’s landmark ruling in Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203 (1990). Advance payments for goods or services are immediately taxable upon receipt (Schlude v. Commissioner, 372 U.S. 128 (1963)). Conversely, a deposit is nontaxable if the recipient is subject to an unconditional obligation to repay.

Crucially, the Supreme Court mandated that:

“Whether . . . customer deposits are the economic equivalents of advance payments, and therefore taxable upon receipt, must be determined by examining the relationship between the parties at the time of the deposit.” Commissioner v. Indianapolis Power & Light Co., 493 U.S. at 212 (emphasis added).

Bona Fide Debt and the Ninth Circuit 7-Factor Test

To qualify as a nontaxable loan, disbursements must be accompanied at the time of transfer by an unconditional obligation on the part of the transferee to repay and an unconditional intention on the part of the transferor to secure repayment (Haag v. Commissioner, 88 T.C. 604, 615–16 (1987); Commissioner v. Tufts, 461 U.S. 300, 307 (1983)). A conditional obligation to repay does not create a valid debt for tax purposes (Taylor v. Commissioner, 27 T.C. 361, 368–69 (1956)).

Under controlling Ninth Circuit precedent (Welch v. Commissioner, 204 F.3d 1228, 1230 (9th Cir. 2000)), courts apply a seven-factor test to ascertain whether a transaction constitutes a bona fide loan:

Whether the promise to repay is evidenced by a note or other instrument;
Whether interest was charged;
Whether a fixed schedule for repayments was established;
Whether collateral was given to secure payment;
Whether repayments were made;
Whether the borrower had a reasonable prospect of repaying the loan and whether the lender had sufficient funds to advance the loan; and
Whether the parties conducted themselves as if the transaction were a loan.

Application of Law to the Facts

Applying these principles, the Tax Court evaluated whether Mr. Tunkl possessed complete dominion over the $16.5 million upon receipt and systematically rejected both of his asserted defenses.

Realization of Income via Unrestricted Control

The court found that Ganymede received the $16.5 million wire on January 11, 2018, without any contractual restrictions imposed by Mr. Mnuchin. Mr. Tunkl exercised total economic dominion over the funds when he diverted $17.4 million on January 16, 2018, to pay the second installment on Ganymede’s Bacon painting deal. As Judge Landy observed, “Mr. Tunkl used the $16.5 million at will and derived economic benefit from it because he was unable to purchase the Bacon painting without those funds”. Under James and Rutkin, this unrestricted disposition established prima facie taxable gross income.

Rejection of Customer Deposit Characterization

Judge Landy rejected the customer deposit argument on three distinct factual and legal grounds:

Investor/Partner Relationship vs. Customer: Evaluating the relationship “at the time of the deposit” as required by Indianapolis Power & Light Co., the court concluded that Mr. Mnuchin was a joint investor and partner, not a customer. Mr. Tunkl was not providing brokering services for a commission on the Picasso deal, nor was he selling the artwork to Mr. Mnuchin. Instead, the parties intended to combine capital to purchase the painting for resale to a third party and split net profits.
Absence of Repayment Obligation at Transfer: The documentary evidence (including the backdated invoice, Agreement, and Demand Note) demonstrated that no obligation to repay existed in January 2018 when the funds were transferred. The court emphasized that “Mr. Tunkl’s obligation to repay Mr. Mnuchin did not arise until months later when the deal fell through”. Furthermore, the invoice created in May 2018 (backdated to January 10, 2018) contained no repayment provisions.
Retention of Funds: Most significantly, the court highlighted that “Mr. Tunkl has been permitted to keep the entire amount he received from Mr. Mnuchin”. Of the aggregate $44 million liability across six failed transactions, Mr. Tunkl repaid only $2.5 million via an equity assignment, offering no proof that any portion was allocated to the $16.5 million Picasso note. Moreover, the Gallery never initiated civil legal proceedings to collect the balance.

Judicial Note on Subchapter K and Party Presentation Doctrine

In footnote 3 of the opinion, the court noted that while the arrangement resembled a joint venture or partnership under IRC §§ 761(a) and 7701(a)(2), neither party introduced sufficient evidence or presented legal arguments under Subchapter K of the Code. Citing the Supreme Court’s decision in United States v. Sineneng-Smith, 140 S. Ct. 1575, 1579 (2020), and Tax Court precedent in Mendes v. Commissioner, 121 T.C. 308, 312–13 (2003), Judge Landy held that under the principle of party presentation, any potential Subchapter K tax arguments were deemed abandoned and conceded.

Rejection of Loan Proceeds Characterization

Applying the Ninth Circuit’s seven-factor test in Welch v. Commissioner, the Tax Court held that “the terms of the unsettled transaction bear no indicia of a loan”:

Promissory Note: No note or written instrument existed on January 11, 2018. The Demand Note was executed five months later, after the transaction failed.
Interest Rate: The June 2018 Demand Note explicitly specified that repayment was “without interest”.
Repayment Schedule: Neither the note nor the underlying agreement contained a fixed repayment schedule; the note was payable strictly “on demand”.
Collateral: No collateral was demanded or pledged to secure the advance.
Actual Repayments: Mr. Tunkl repaid only $2.5 million toward an aggregate $44 million debt, with no specific allocation to the $16.5 million advance.
Expectation of Repayment: At the time of transfer, Mr. Mnuchin had no expectation of personal repayment from Mr. Tunkl. As Judge Landy highlighted, “Mr. Mnuchin expected that he would recoup his investment by receiving a share of the profits from a subsequent resale of the Picasso painting”.
Conduct of the Parties: The parties conducted themselves as profit-sharing joint venture equity partners rather than lender and borrower.

Tax Court’s Ultimate Holding and Conclusion

Because the $16.5 million received by Ganymede was neither a nontaxable customer deposit nor a bona fide loan, the Tax Court held that the entire receipt constituted gross income under IRC § 61(a) for the 2018 tax year. As the sole shareholder of Ganymede, Mr. Tunkl was required to report the flowthrough income on his Form 1040.

Judge Landy sustained the Commissioner’s Notice of Deficiency in full, entering a decision for the Respondent.

Practitioners advising clients on informal commercial transactions or capital advances must take heed of Tunkl. Contemporaneous written documentation defining the precise legal nature of an advance—executed at the time funds are transferred—is essential to withstand IRS scrutiny. Ex post facto agreements and notes executed after a transaction collapses will not retroactively recharacterize unrestricted funds into nontaxable debt or deposits.

Prepared with assistance from Gemini Notebook.