In Uncategorized on 05/21/2012 at 16:53

And an LLC is No Different

So paraphrases Judge Kroupa in Jack Trugman and Joan E. Trugman, 138 T.C. 22, filed 5/21/12; Gertrude Stein would be pleased.

Jack and Joan had a Sub S for their various rental properties, and had filed 1120s for the 19 years of the Sub S’s existence, during which time they dwelt in rented premises. Seeking to avail themselves of Congressional largesse in the form of the Section 36 FTHBTC2, they bought a dwelling in a State with no state income tax, contributing $7500 of their own cash while their Sub S graciously chipped in $319,500 and took title. Jack and Joan claimed the Section 36 credit, and the Sub S did not.

But pass-through entities are not individuals, and even though Jack and Joan might have qualified if they took title themselves, Congress meant for their largesse to be sufficiently guided so as to fall into the laps of individuals only.

Judge Kroupa: “We hold that S corporations are not individuals for purposes of section 36. A corporation, at its core, is a business entity organized under State or Federal law, whether an association, a company or another recognized form. A corporation that satisfies certain criteria may elect small business status for Federal income tax purposes. An S election does not alter the corporation’s corporate status; it merely alters the corporation’s Federal tax implications.  Items of income, deduction, loss and credit generally pass through to the shareholders. S corporations remain freestanding entities ‘independently recognizable’ from their shareholders.” 138 T. C. 22, at p. 4-5 (Citations omitted).

Section 36 mentions “individuals” 36 times, corporations zero times, says Judge Kroupa (huzza for the “global search” function!). Corps do not have principal residences, they have principal places of business. Individuals have their own Title in the IRC, and corps have their own as well. Never the twain shall meet.

Jack and Joan claim an IRS employee told them they could do it. Too bad, says Judge Kroupa, but the law is the law. “Petitioners seek leniency by arguing that IRS representatives indicated that they could claim the tax credit if the property was purchased through the S corporation. It is unfortunate when a taxpayer receives inaccurate information. We have recognized, however, that incorrect legal advice from an IRS employee does not have the force of law and cannot bind the Commissioner or this Court. Ultimately, statutes, regulations and judicial decisions govern a taxpayer’s tax liability. “ 138 T. C. 22, at p. 7 (Citations omitted).

So Jack and Joan are thrown out at home.

And so are Felix Rospond and Loretta Rospond, 2012 T. C. Sum. Op. 47, filed 5/21/12, a “not for nuthin’” Section 7463. Felix and Lorie formed a New Jersey LLC to hold family assets, bought their house in the aforesaid LLC (which had the fetching name of Jacco Associates, LLC) , and claimed the FTHBTC2.

Same result from Judge Wells, who doesn’t cite Judge Kroupa’s decision in Trugman, supra, but has a bushel basket full of cases and rulings wherewith to beat up Felix and Lorie. Pass-through or disregarded, if it isn’t an individual taxpayer’s principal residence, no Section 36 credit.


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