In Uncategorized on 01/27/2020 at 16:01

IRS hasn’t had an easy time with Anthony I. Provitola & Kathleen A. Provitola, et al., Docket No. 16187-17, filed 1/27/20. Anthony is an attorney who is more inventive than most. See my blogposts “I Love My Cigar,” 2/6/19, and “A Canard,” 12/11/19. In fact, Anthony invented, and got seven (count ‘em, seven) patents for, some kind of device to improve television viewing. And, as the aforementioned blogposts more particularly set forth, he has led both IRS and Tax Court a merry chase.

Judge Buch has the finisher, in an off-the-bench designated hitter, wherein Anthony’s roundy-round with money between APPA (his Professional Association, a/k/a his law practice) and Kathleen’s Sub S (the marketing arm of his invention) runs aground. Kathleen’s Sub S has no deduction for what she paid APPA, because those are Section 195 start-up costs, not Section 162 ordinary-and-necessaries, because the TV stuff isn’t up and running.

IRS’ arguments are far from crystalline. IRS first claims substance-over-form, but the transfers were real.

Form-over-substance craters. “However, we will respect [Sub S] ‘s form because it is engaged in activities with a business purpose. Mr.  Provitola is currently working on inventing and bringing to market his television viewing product through [Sub S]. He has developed the product and obtained several patents in the process. Although it is unclear at this time whether the product will be commercially viable, approximately 1,000 units of the product have been manufactured with the hope of eventual sale. A website has been created for that purpose, although that website is not yet public. The Provitolas treated [Sub S] as a discrete entity; for example, [Sub S] maintains a separate bank account. [Sub S] is not a ‘sham or unreal’ nor is it ‘a bald and mischievous fiction.’ [Sub S] exists to develop an bring to market Mr. Provitola’s invention, and we will respect its existence.” Transcript, at pp. 11-12.

Judge Buch notes the SNOD only questioned the deductions by the Sub S, not the income to APPA. So this isn’t a true roundy-round, because therefore the income to APPA is real. But Anthony isn’t home free.

“Distinct from the substance over form argument, the Commissioner argues: ‘[Sub S] was not actually engaged in business during the [years at issue]. At best, the transfers from [Sub S] to the law practice could be considered start-up expenses, which are not deductible for the years they were made.’ We will characterize this as a start-up expenditures argument.” Transcript, at p. 9.

“[Sub S] has not yet commenced an active trade or business. …[Sub S] has taken significant steps to prepare for the business of selling Mr. Provitola’s invention. [Sub S] has not yet attempted to market or sell a product. It has not made any sales, made its website public, or attempted to market a product.” Transcript, at p. 15.

So Sub S can amortize the start-up expenses, if, as and when it starts operating.

True, the start-up argument is new matter, but Judge Buch says IRS easily bore the burden of proof on that. And Anthony did his own taxes, he’s a Tax Court admittee, and he put in no evidence about substantial authority. IRS only has the Section 6751(b) Boss Hoss for substantial understatement, so if the numbers work for the five-and-ten, Anthony and Kathleen get chopped therefor.

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