In Uncategorized on 09/17/2020 at 17:32

Ex-Ch J Michael B (“Iron Mike”) Thornton has that hard lesson for Clinton Deckard, 155 T. C. 8, filed 9/17/20. Clint formed and bankrolled a KY N-f-P (Not for Profit Corp.) to run fashion shows to assist the redevelopment of the Louisville waterfront. It never got 501(c)(3)ed, and its first fashion show cratered, leaving Clint with heavy-duty out-of-pockets and no way to write them off.

Two years later, Clint files a retro Sub S election, and takes two years’ worth of passthrough Sub S losses on his 1040s.

Unhappily, the KY N-f-P law says “no shareholders, no distributions to individuals or for-profits.” Clint claims beneficial ownership of the non-existent stock.

” [A]lthough the meaning of ‘shareholder’ for purposes of Subchapter S election has been said to be a matter of federal law rather than of state law, this means only that it is federal law which determines which kind of shareholder–namely, beneficial rather than record–is required to elect in order for the corporation to achieve Subchapter S status. Whether a particular investor was a shareholder of that kind– in this case was a beneficial shareholder of * * * [the corporation] on the date of the election–is an issue of state law. [Citation omitted.].” 155 T. C. 8, at p. 12.

And at pp. 14-16 ex-Ch J Iron Mike has his usual “copious citation of precedent and somber reasoning” to show that “nonprofits do not have owners,” except maybe cemeteries. The idea is that nonprofits cannot provide benefits to insiders like officers, directors and shareholders, both record and beneficial.

Clint’s argument that the N-f-P is tantamount to a profitmaker founders on KY law and Nat’l Alfalfa. “He asserts that he intended [N-f-P] to be a for-profit entity and ‘objectively operated’ it ‘consistently with it being a for-profit entity that he owned entirely.’ He urges that ‘the only fact inconsistent with [N-f-P] * * * being a for-profit entity is that an attorney formed * * * [it] as a nonprofit corporation prior to when the economic realities of the project came to light.’ He states that although he ‘should have sought to change [N-f-P’s] * * * corporate documents to reflect’ these changed plans, he was ‘mistakenly unaware of these formalities of corporate law’ and so treated [N-f-P] ‘like he was the sole owner in every practical sense.’” 155 T. C. 8, at p. 21.

Like Nat’l. Alfalfa says, “Taxpayers are generally bound by the form of the transaction they choose.” 155 T. C. 8, at p. 21.

Of course Clint blames his former attorney for everything. I’ll spare me from having to write it and you from having to read it.

And ex-Ch J Iron Mike spares himself from having to figure out whether pore l’il ole Tax Court has jurisdiction to determine whether a valid retro S election was made. The previous cases involved determinations at shareholder level in TEFRA cases. Here no stock, so nothing to elect.

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