In Uncategorized on 07/13/2021 at 16:14

Just lately there has been a lot of news around this Minor U.S. Outlying Island concerning payment of personal expenses from corporate sources. I’d commented elsewhere that such delictions might be alleged against any number of corporate entities and their controlling persons. Today we have proof of my assertion, in fifty-nine (count ’em, fifty-nine) pages of Judge Elizabeth Crewson Paris’ prose; read all about it in Blossom Day Care Centers, Inc., 2021 T. C. Memo. 87, filed 7/13/21. Except the docket for the case is blocked, and says it’s sealed; exactly why I can’t tell*.

The case is the usual. Officers and their family members used AMEX and CitiCards issued in the corporate name, with all charges paid for by the corporation, for personal expenses and more. And there’s unreported income and self-rentals, but nothing new there either.

“In addition to routine personal purchases, such as restaurant meals, auto expenses, and personal medical expenses, the Hs either used the corporate credit card to pay or had petitioner pay their personal credit cards for such expenses as college tuition, vacations, jewelry, and other luxury items. The H children continued to make personal purchases with the credit cards even during periods when they were not employees of petitioner or H Corp.” 20-21 T. C. Memo. 97, at pp. 10-11. (Names omitted).

But the Hs are spared Section 6663 fraud chops because their trusty CPA and later their equally trusty employee bookkeeper made  “Note Receivable from Officers” entries.

“Regarding the inappropriate deductions, respondent is correct that petitioner claimed large deductions for expenses either that were personal or that lacked a demonstrated business purpose, and the Court has sustained respondent’s disallowance of such deductions in large part. However, petitioner maintained a running balance, reported on its returns as ‘Note Receivable from Officers.’ The balance of the purported note increased from $236,189 at the beginning of 2004 to $1,332,006 at the end of 2007, an increase that closely tracks the credit card expenditures respondent determined to be personal expenses. Petitioner’s recording and reporting of the expenses indicates an acknowledgment of their personal nature and an intention to repay or recognize as dividends the deemed distributed amounts at some point in the future, albeit an unspecified and indeterminate one.” 2021 T. C. Memo. 87, at p. 55.

So while the “Note Receivable” isn’t a note (or at least none was proffered on the trial), and maybe doesn’t truly evidence a debt, for want of documentation, stated maturity, interest, stated events of default, and suchlike, reporting it on the returns might just be enough to dodge “clear and convincing” proof of fraud. And the corp did overstate receipts in two years, while understating same in two others. After all, maybe sloppy saves the day. Except maybe it’s a guaranty you’ll be audited. Don’t try this at home (or anywhere else).

There’s no need for Boss Hossery for the Section 6662a chops when a corp is the target, and IRS came up with a Boss Hoss signed-off copy of the answer before first asserting chops. However, I question Judge Paris’ reliance on Koh unless it has been established that the first mention of chops did not occur until after the Boss Hoss signed-off answer had been served; see my blogpost “Greaves on Graev,” 6/4/20.

The corp’s Section 45A Indian employment tax credit fails for illegible records. And while Mrs. H is an Indian, she owns 51% of the business, and that sinks her claimed credit. (Name omitted).

So despite our local prosecutors’ proclamations that they have trodden new ground, or at any rate have found a novel dodge, this story and theirs are both many-times-told tales.

*Edited to add, 4/5/22: Though sealed on the Tax Court website, despite the Genius Baristas’ averments that they would unseal whatever they could (yeah, roger that, most F affirmative (the F is for emphasis)), the opinion is all over the internet.


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