Taxable Talk

When an S corporation has a loss, the loss flows through to its’ shareholders. But shareholders can only take the loss if they have a basis in the corporation; the basis is (in general) the shareholder’s share of the profits (to date), plus his share of the capital and his share of any loans made to the corporation.

In order for a shareholder to increase his basis in an S corporation, the shareholder must make a real outlay; as the Tax Court stated today,

“…to satisfy this requirement, even in circumstances where the taxpayer purports to have made a direct loan to the S corporation, the taxpayer must show that the claimed increase in basis was based on “‘some transaction which when fully consummated left the taxpayer poorer in a material sense.’” Bergman v. United States, 174 F.3d 928, 932 (8th Cir. 1999) (quoting Perry v. Commissioner, 54 T.C. 1293, 1296 (1970), affd. 27 AFTR 2d 71-1464, 71-2 USTC par. 9502 (8th Cir. 1971)); see Hitchins v. Commissioner, 103 T.C. 711, 715(1994). This doctrine ensures that the transaction has some economic substance beyond the creation of a tax deduction. Oren v. Commissioner, 357 F.3d 854, 857 (8th Cir. 2004), affg. T.C. Memo. 2002-172.” [Kaplan v. Commissioner, T.C. Memo 2005-218]

In the case decided today, an owner of multiple S corporations took out a bank loan, then “loaned” one of his S corporations money which loaned another S-corporation….The Tax Court decided that there was no economic basis for the transactions and sustained the IRS’ determination of a loss with no basis. Additionally, the petitioner claimed legal fees but had no back-up documentation; he lost that argument, too.

Case: Kaplan v. Commissioner, T.C. Memo 2005-218

Sometimes one must only look in the mirror to see who is the bozo. Yesterday, a taxpayer who didn’t file claimed that the IRS “…prepared only “dummy returns” for 2000 and 2001, and that respondent’s determination of his deficiencies in income tax for 2000 and 2001 is invalid because respondent did not prepare for each year a substitute return that qualified under section 6020(b).” As the Tax Court noted, “Where a taxpayer files no return, [the IRS] may determine the deficiency as if a return had been filed on which the taxpayer reported the amount of tax due was zero; the deficiency is the amount of tax due. Laing v. United States, 423 U.S. 161, 174 (1976); Schiff v. United States, supra; Roat v. Commissioner, supra.”

The petitioner also lost on his contention that he can use statistical information on his industry for deductions (you must keep records of your expenses). And he received failure to file penalties.

Case: Stewart v. Commissioner (T.C. Memo 2005-112)