The Tax Court delivered a trick on Halloween to these taxpayers. They operated a timber operation (perhaps), accounting services (although the husband was “…suspended from practice before the Internal Revenue Service since 1981”), real estate (although the wife asked, “[please] don’t issue me a 1099”), and they sort of used leased employees. It was ugly….
The taxpayers formed an S Corporation, or tried to. They filed the paperwork, but they specified that their “natural business year” ended in January. The IRS didn’t approve, so the S Corporation was never really formed. Although I’m only slightly cynical, might the taxpayers involved tried January so that they could defer tax payments for eleven months? But I digress.
As the Tax Court noted, “An election of a corporation to be an S corporation under sections 1361(a) and 1362(a)(1) must be complete, properly filed, and made in accordance with regulations….” The taxpayers took flow-through losses which the IRS challenged. They didn’t substantiate them in court. Strike one.
The taxpayers claimed they weren’t subject to the self-employment tax. But they weren’t employees and received payments for services. Strike two.
Finally, they claimed that they paid out about $18,000 for “leased employees.” But the Tax Court noted that the money came from the taxpayers personal services. That doesn’t sound like leased employees to me, and it didn’t to the Tax Court. Strike three.
We could throw in strike four and more for labor expenses that paperwork shows happened in 2000 but were deducted in 2001, and interest expenses without backup, and repair expenses without backup. The Tax Court threw in accuracy related penalties for the taxpayers’ strike-out. (“Petitioners make no argument and offered no evidence to show that they had reasonable cause.”)
Case: Arnold, et. al., v. Commissioner