In Uncategorized on 02/06/2014 at 16:08

No, not Julie Jordan, the heroine of the Rodgers and Hammerstein 1945 classic, whose song led off many an AIDS Walk. No, this is the story of Dr. Elizabeth A. Vitarbo, whose story appears in a small-claimer from the word processor of STJ Lewis (Gotta Love That Name) Carluzzo, namely and to wit, 2014 T. C. Sum. Op. 11, filed 2/6/14.

Dr. Vitarbo is a neurosurgeon. Induced by promises of payoff of student loans, moving expenses, and guaranteed income, Dr. Vitarbo moved to Wilson, NC, and began practicing there. There was the usual disappearing indebtedness, represented by promissory notes which IRS agreed was real debt, to make sure Dr. Vitarbo stuck to Wilson and environs and kept on practicing.

She did.

But she did as employee of her wholly-owned Sub S corporation. And she gave herself W-2s, until she dissolved the Sub S. STJ Lew says the tax consequences of the dissolution are unknown, and he, Dr. Vitarbo and IRS are apparently content to leave it so.

After that, Dr. Vitarbo worked for the local hospital, but got into a fight with them. They settled the lawsuit: Dr. Vitarbo paid the hospital $240K, and her lawyer $120K. Half the lawyer’s fee was paid in the year at issue.

Dr. Vitarbo had a bunch of ordinary-and-necessaries, along with the $60K legal fee, all of which IRS concedes.

So why the fight? Well, do the ordinary-and-necessaries and the $60K go on Schedule C (and thus hit the 1040 above the line), or do they go on Schedule A (miscellaneous itemizeds) and hit below the line, less 2% of AGI of course. And subject to phaseout and AMIT.

Dr. Vitarbo claims self-employed. She agrees that employees can deduct ordinary-and-necessaries, but claims she’s not an employee. She never was employed by the hospital. She went to work for an educational institution (unnamed) after she dissolved the Sub S.

STJ Lew says she’s right, but that isn’t the point. “We agree with her that she was never so employed, but respondent’s [IRS’] position that the deductions are properly claimed on a Schedule A is not premised upon the ground that she was. Instead, respondent points out that petitioner did not practice medicine as a sole proprietor at any time relevant here, and therefore any income or deductions attributable to that practice are not properly reported on a Schedule C. As respondent views the matter, petitioner’s status as: (1) an employee/shareholder of [her Sub S] until her employment with the educational institution began… and (2) as an employee of that educational institution during…, the year the expenses giving rise to the disputed deductions were paid, is taken into account in the determination of the proper treatment of the disputed deductions, not her employment relationship with [the hospital]. As respondent views the matter, all of the disputed deductions are properly claimed on a Schedule A, subject to reductions as provided in section 67(a) and taken into account in the computation of petitioner’s alternative minimum tax liability.” 2014 T. C. Sum. Op. 11, at pp. 9-10.

Dr. Vitarbo worked for some unknown party before relocating to colorful downtown Wilson, NC (employee), was employed by her Sub S (although a Sub S is a passthrough, it’s not a disregarded), and then by the educational institution, so she never walked alone. Thus, never self-employed.

Since IRS conceded the legal fee payment and most all of the ordinary-and-necessaries, it only remains to plug the numbers into a Schedule A, lose the Schedule C, and do a quick Rule 155.

And IRS even concedes the Section 6662(a) accuracy chop.

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