Attorney-at-Law

EARNINGS & PROFITS

In Uncategorized on 04/25/2017 at 15:52

That phrase always puzzled me. I’d always thought you could have profits, whether earned or unearned, if you took in more than you paid out. Earnings meant something you worked for. Many years ago I heard the phrase “money you had to get up in the morning for.” That sounded like earnings to me.

Anyway, Gregory Alan Brown, 2017 T. C. Sum. Op. 24, filed 4/25/17, had a C Corp electrical contracting operation that had a profitable year for the year in question. The C Corp isn’t a party to this case, so we don’t know what its tax posture might have been, but there was enough cash in the till for Gregory to write a $5K check for his mortgage interest, among other things not itemized by Judge Colvin. Maybe the unitemized personal expenses paid by the C Corp were conceded.

Now title to the home in question was shared by Gregory with a person to whom Gregory wasn’t married. That person paid some mortgage interest, was the primary obligor on the mortgage, so got the 1099-INT for the whole enchilada.

Gregory gets to deduct his share, as State law (MD) says he has equitable title. What the co-owner actually deducted, and whether the SOL has run on her, thereby whipsawing IRS, is not mentioned.

IRS claims constructive dividend for the $5K post-trial. Judge Colvin gives IRS an amendment to the answer, with the burden of proof thrown in. But that’s easy, because C Corp had no interest in the home, and Gregory himself testified that the C Corp was profitable.

Hence earnings and profits, hence an undeclared, but nevertheless taxable, dividend, to Gregory; but he gets the $5K mortgage interest deduction, so it’s a wash.

Just when you thought it was simple, we find the former owner bows out, and Gregory marries someone else.

The someone else had children, whom she wanted to keep in school and therefore didn’t move in with Gregory for a while.

Gregory filed HOH. IRS says he should have filed MFS.

Judge Colvin: “Generally, to qualify as a head of household, a taxpayer, among other requirements, may not be married at the close of the taxable year.  Sec. 2(b). Petitioner agrees that he was married throughout [year at issue].  However, an individual is not considered married for the purpose of determining head of household filing status if he or she is legally separated from his or her spouse under a decree of divorce, if his or her spouse is a nonresident alien, or if (inter alia) he or she lives apart from his or her spouse for the last six months of the taxable year.  Secs. 2(b)(3), (c), 7703(b).  As relevant here, petitioner testified that Mrs. Brown lived with him for at least part of the second half of [year at issue].  Thus, petitioner’s correct filing status is married filing separately, not head of household.” 2017 T. C. Sum. Op. 24, at pp. 8-9.

Takeaway- Residence rules are technical, and they cover more than one tax issue. Good planning may mean camping out for a while. See my blogpost “Old Tax Credits Never Die,” 11/6/12.

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