In Uncategorized on 08/24/2016 at 16:23

When the sole shareholder of a Sub S pumps in cash to run the business, and claims it’s a loan and not a (non-deductible) capital contribution, whereof repayment is return of principal and not wages or a distribution, IRS looks for the Big 13 (count ‘em, 13) indicia that a loan was intended: (1) the names given to the documents that would be evidence of the purported loans; (2) the presence or absence of a fixed maturity date; (3) the likely source of repayment; (4) the right to enforce payments; (5) participation in management as a result of the advances; (6) subordination of the purported loans to the loans of the corporation’s creditors; (7) the intent of the parties; (8) identity of interest between creditor and stockholder; (9) the ability of the corporation to obtain financing from outside sources; (10) thinness of capital structure in relation to debt; (11) use to which the funds were put; (12) the failure of the corporation to repay; and (13) the risk involved in making the transfers.

You’ll find this list, and some cases applying the factors, at page 9 of Scott Singer Installations, Inc., 2016 T. C. Memo. 161, filed 8/24/16.

Scott made loans to his wholly-owned Sub S, of which he was the only director and officer and called all the shots. And there were no notes, maturity dates or stated rates of interest.

But Scott booked all the loans as loans, and when things were good paid some of them back. Scott sold kitchen cabinets and repaired, serviced and fitted out RVs, but the 2008 meltdown seriously cramped his cashflow, and he borrowed from friends and family and used his personal credit card to run the business.

The Sub S paid for some of Scott’s personal expenses, which he claimed were repayments of the loans.

You were expecting income tax here, weren’t you? But this is a FICA-FUTA case. Was what Scott got from the Sub S wages subject to FICA-FUTA, or repayment of loans?

Judge Vasquez doesn’t go out on a limb here. “Petitioner does not object to respondent’s determination that Mr. Singer was its employee for the years at issue, and the evidence clearly supports such a finding.  As president of the company, Mr. Singer was petitioner’s only officer.  Furthermore, he performed substantial services for petitioner.  Accordingly, we find that Mr. Singer was an employee of petitioner for the years at issue.” 2016 T. C. Memo. 161, at p. 8.

So Scott is up for the FICA-FUTA, right? Just run the checklist.

Not quite.

“Rather than analyze every factor on the debt-equity checklists, we confine our discussion to those points we find most pertinent.  In our analysis we look at the relative financial status of petitioner at the time the advances were made; the financial status of petitioner at the time the advances were repaid; the relationship between Mr. Singer and petitioner; the method by which the advances were repaid; the consistency with which the advances were repaid; and the way the advances were accounted for on petitioner’s financial statements and tax returns.  After looking at all these criteria in the light of the other factors traditionally distinguishing debt from equity, particularly the intent factor, we believe Mr. Singer intended his advances to be loans and we find that his intention was reasonable for a substantial portion of the advances.  Consequently, we also find that petitioner’s repayments of those loans are valid as such and should not be characterized as wages subject to employment taxes.” 2016 T. C. Memo. 161, at pp. 10-11.

Scott always booked the loans as such, the Sub S paid back by paying Scott’s personal expenses consistently and timely, and, most importantly, the Sub S was paying Scott’s expenses even when it was running at a loss.

A creditor gets paid – win, lose or draw.  One making a capital contribution, as IRS claims Scott did, only gets paid if the operation makes money.

When the business was doing well (and it did do well before 2008), Scott had a reasonable expectation of repayment, so the loans for those years are loans. And the loan balances outstanding in the good years were greater than the amounts repaid, so no distribution.

But the post-2008 loans weren’t: Scott had little to no chance of repayment.

Scott wins.

And once again acknowledgement to James R. Monroe, Esq.  See my blogpost “When You’re Down and Out – Part Deux,” 6/28/16.

Not big dollars here, so maybe no appeal, but if I were IRS I’d go for it.



In Uncategorized on 08/24/2016 at 14:44

I’m sure I’d not be the only listener applauding Judge Mark V. Holmes if he joined Petula Clark, Astrud Gilberto, Frank Sinatra and Frankie Valli on and began singing the eponymous tune above-captioned.

In default thereof, The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Illustrious, Incontrovertible, Indefatigable, Imperturbable, Ineluctable and Ineffable Foe of the Partitive Genitive, and Old China Hand, addresses his request in writing to Rosie Lawler, Docket No. 16712-13, filed 8/24/16.

Rosie wants innocent spousery, and IRS is willing to give her some, but Rosie wants the whole enchilada.

Rosie thinks Judge Holmes gave her that, but she’s confused by Tax Court’s docket squad’s somewhat arcane legal phraseology.

“The IRS reported by the end of last year that a settlement was near, because it was willing to grant her partial relief. Ms. Lawler then refused to sign a decision document, because she claimed that a previous order of the Court…somehow granted her full relief. The Court will concede that its prior order is confusing — it granted what the Docket Section titled Ms. Lawler’s ‘Motion for Leave to File Amendment to Amended Petition, as Amended Embodying the Amendment to Amended Petition, as Amended.’ But, to a trained eye, this just means that the Court was allowing Ms. Lawlor to amend her petition to ask for innocent-spouse relief. It does not mean that the Court had decided to grant her full relief.” Order, at p. 1. (Emphasis by the Court).

I’ll confess that title confused me.

OK, so does Rosie want to take the partial win, or continue to go for the gold?

Judge Holmes attempts to put that question to Rosie, but as the old chewing gum commercial put it, “she ain’t talkin’ while the flavor lasts.”

“Since earlier this year, this division has tried to set up a telephone call with Ms. Lawler to try to explain this. She has steadfastly refused to do so. The Court will therefore add her case to its next calendar in Birmingham for a status conference. If she refuses to appear to discuss her case then, the Court will invite the IRS to move to dismiss it for her failure to properly prosecute.” Order, at p. 2.

Rosie, ya should’a called the Judge. Judges, like IRS, get peevish when ignored.


In Uncategorized on 08/23/2016 at 17:25

As my longer-term readers know, I have a love-hate thing with continuing ed. We certainly need refreshers, especially as we have reverted to the pre-1939 annual Revenue Acts, where laws sunrise and sunset like the Bock and Harnick tune of that name.

But there’s a lot of junk CLE and CPE out there. And the overseers of the process sometimes get taken as well as the eductaees.

I understand AICPA and NASBA have enacted the following restriction on self-study CPE courses: “S9-06. Program or course expiration date. Course documentation must include an expiration date (the time by which the participant must complete the qualified assessment). For individual courses, the expiration date is no longer than one year from the date of purchase or enrollment.” The Statement on Standards for Continuing Professional Educational (CPE) Programs Revised August 2016, at p.13.

That’s all very well for CPAs. My CPE provider, which does CPE for EAs like me as well as for CPAs, dropped two of the courses for which I’d paid thirteen months ago or so, but hadn’t completed. I reminded them that the AICPA/NASBA rules don’t apply to EAs who aren’t CPAs, and neither OPR nor RPO has similar rules.

And both courses had the PATH 2015 updates in them.

Given that EAs need 72 hours’ CPE triennially, with at least 16 hours each year in the triennium, it makes sense to buy courses on sale when the area isn’t likely to change for one year (e.g., divorce, education). I hope neither OPR nor RPO blindly follows the AICPA lead.

This trend looks like the old textbook scam. Every year the authors “update” the textbook by adding a paragraph here and there, and charging a couple hundred bucks (hi Judge Holmes) for the new edition. Students who of necessity must buy or sell “used” textbooks are out of luck. And the authors, as my UK clients say, are “quids in.”

I’m not denigrating all CPE. I find that I learn every day, and a good course is well worth the time, effort and money. My provider’s AMT course was worth the price. To repeat something I said a long time ago, I agree that snoring through an in-person class, or taking an on-line test, will not of itself rid our fields of endeavor of every bad actor; but it is at least a start.

Only, while trying to improve all CPE, let’s not make it a racket.



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