In Uncategorized on 01/17/2017 at 18:15

No, not Mary McCarthy’s 1963 succès de scandale. This is the prosaic story of Stephen P. Hardy and Angela M. Hardy, 2017 T.C. Memo. 16, filed 1/17/17, told by Judge Buch.

Steve (that’s Doc Steve) is a plastic surgeon who needs a quiet place to operate, so he buys a 12% interest an LLC that operates a facility wherein Doc Steve can surge when he needs to and can’t get time and space from a local hospital. Doc Steve also surges in his own office, which is off-campus from the facility. Doc Steve has a separate PLLC, which Angie runs, for his surgical practice.

Doc Steve has no say-so over hire-fire or operations of facility LLC.

Originally Doc Steve reported his earnings from both his practice PLLC and the facility LLC as active, because his trusty CPA with 40+ years of experience, believed the K-1, and Doc Steve paid SE.

But after quizzing Doc Steve, trusty CPA reports the next year as PLLC active, facility LLC passive, and deducts passive losses, including a passive loss carryforward from the years Doc Steve reported everything as active.

That last he can’t do, because had he reported those previous years as passive, the losses he would now carry forward would have absorbed his taxable income from that source. And it’s too late for equitable recoupment, because Doc Steve only raised it post-trial.

Steve does get credit for the SE he paid, because he was only a passive investor in the LLC.

IRS claimed Doc Steve grouped both PLLC and LLC, and therefore it’s all active. Except trusty accountant claimed he never grouped, and IRS needs an inference to dispel this, which they don’t get.

IRS says it can regroup, where grouping or non grouping does not reflect an reasonable economic situation or to correct a grouping or nongrouping is a tax dodge.

But nongrouping is reasonable here.

“While some facts support treating Dr. Hardy’s ownership interest in [LLC] and his medical practice as a single economic unit, the weight of the evidence supports treating them as separate economic units. Dr. Hardy is the sole owner of his medical practice and only a minority owner of [LLC]. Although he actively manages his medical practice, Dr. Hardy does not have any management responsibilities in [LLC]. His medical practice and [LLC] do not share any building space, employees, billing functions, or accounting services. Dr. Hardy performs services different from [LLC]’s: Dr. Hardy is a surgeon providing care, and [LLC] is a surgical center providing space and associated services. Dr. Hardy is limited in the care he can provide at his office. His office is equipped for procedures requiring local anesthesia whereas [LLC] is equipped for procedures requiring local or general anesthesia. When patients decide to have procedures performed at [LLC], they separately pay a surgical fee to Dr. Hardy and a facility fee to [LLC]. [LLC] then distributes earnings from those facility fees, but the distribution is unrelated to whether Dr. Hardy performs surgeries at [LLC]. In contrast, Dr. Hardy will receive income from his medical practice only if he performs procedures. Thus, the income Dr. Hardy receives from [LLC] is not linked to his medical practice. Accordingly, Dr. Hardy’s ownership interest in [LLC] and his medical practice may be treated as separate economic units.

“Additionally, the Hardys did not have a principal purpose of circumventing the underlying purposes of section 469 when they treated the activities as separate.” 2017 T. C. Memo. 17, at pp. 23-24. (Footnote omitted).

Doc Steve wins. His two deals aren’t a group.


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