In Uncategorized on 02/27/2012 at 18:01

When It Comes to SE Tax

 A net operating loss (NOL) from a trade or business, whether operated as a partnership or derived from from self-employment, whether carried forward or carried back, is generally a valid deduction. But where? Here’s the story of Joe Decrescenzo, or more properly, Joseph Decrescenzo, 2012 T.C. Mem. 51, filed 2/27/12, Judge Marvel at the helm.

Joe was a CPA who got a heavy-duty SNOD. After extensive negotiations between Joe and IRS, the only thing left for determination was where Joe could take a $51K NOL, on his Schedule C or on his 1040. If on his 1040 and not his Schedule C, he owes $15K in SE tax.

After Joe’s arguments about burden of proof are dismissed (there’s nothing to prove, as he and IRS stipulated everything but the one question of law), Judge Marvel goes to the magic language of Section 1402(a)(4): “'(E)arnings from self-employment’” means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business, plus his distributive share (whether or not distributed) of income or loss described in section 702(a)(8) from any trade or business carried on by a partnership of which he is a member; except that in computing such gross income and deductions and such distributive share of partnership ordinary income or loss–

* * * * * * *

(4) the deduction for net operating losses provided in section 172 shall not be allowed;” 2012 T.C. Mem. 51, at p. 8.

Joe argues that paragraph (4) applies only to partnerships, not individuals like him, since paragraph (5) begins with the word “if”, and goes on to discuss partnerships. Judge Marvel buries that one in a footnote: “Petitioner contends that para. (4) of sec. 1402(a) does not apply to individuals but instead applies only to partnerships. He contends that, because para. (5) of sec. 1402(a) begins with the word “if,” para. (4) of sec. 1402(a) is applicable only if the taxpayer meets the requirements of either subpar. (A) or (B) of sec.  1402(a)(5). Paragraphs (1)-(17) of sec. 1402(a) set forth specific rules for computing net earnings from self-employment. Each numbered paragraph contains a separate rule. Paragraph (4) of sec. 1402(a) operates independently of para. (5) of sec. 1402(a), and the application of para. (4) of sec. 1402(a) is not dependent on the taxpayer’s satisfaction of subpar. (A) or (B) of sec. 1402(a)(5).” 2012 T. C. Mem. 51, at p. 9, footnote 6.

There’s a bushelbasket of cases holding you can’t take NOL against SE. Joe tries to distinguish only one, and fails.

So Joe has the deduction on his 1040. But since he stipulated to the additions to tax if he lost on the SE, he owes those. He tries to get out of the stipulation, saying he suffers from acute anxiety disorder and couldn’t attend the trial, but Judge Marvel kicks that one to the footnotes again: “While petitioner argues that he was unable to appear at trial because of an acute anxiety disorder, he introduced no evidence that he was suffering from the acute anxiety disorder at the time he executed the stipulation. See King v. Commissioner, 121 T.C. 245, 252-253 (2003). Petitioner is bound by the stipulation of settled issues.” 2012 T. C. Mem. 51, at p. 11 (continuation of footnote 8 from p. 10).

I can understand anyone being acutely anxious about taxes, even a CPA like Joe.

  1. Correction: I am informed by Mr. DeCrescenzo that he is not a CPA; according to Judge Marvel, he is an accountant. See her opinion, at p. 3.


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