Attorney-at-Law

CAN’T LOSE YOUR “S”

In Uncategorized on 12/01/2021 at 16:39

I’ve often blogged about petitioners losing their small claimer status (the S suffix on the docket no.) when they cross the $50K line, despite fighting to keep it. But today Hong Jun Chan and Suzhen Mei, 2021 T.C. Memo. 136*, filed 12/1/21, claim they filed Forms 1120 in two (count ’em, two) consecutive years, so the S Corp election they filed for Younique Café, Inc., is gone. Hence, Younique plays no role in their individual tax status, as it’s a separate taxpayer.

Except Judge Albert G (“Scholar Al”) Lauber says that isn’t how you do it.

“Once an entity elects S corporation status, the election is effective ‘for all succeeding taxable years.’ Sec. 1362(c); see Mourad, 121 T.C. at 4 (‘An election to be an S corporation continues until terminated.’). The election will be terminated if and only if (1) the shareholders make an affirmative revocation, (2) the entity ceases to be a ‘small business corporation,’ or (3) the entity’s passive investment income exceeds 25% of its total gross receipts for the previous three years. See sec. 1362(d). Petitioners do not allege that any terminating event occurred during [years it issue] (or previously). They thus have no basis to dispute that YCI was an S corporation during [years at issue]. As a shareholder of YCI, petitioner husband is taxed on a pro rata basis. See sec. 1366(a)(1)(A).” 2021 T. C. Memo. 136, at pp. 9-10.

Hong Jun and Suzhen filed 1040 MFJs for the years at issue, but never mentioned Younique. IRS subpoenaed bank records, and found an aggregate of $1.9 million in taxable deposits. Hong Jun and Suzhen proffer professionally-prepared but undated 1120s, with no evidence that these were ever sent to IRS. And IRS says their records show Younique never filed nuthin’. So, says IRS, it all belongs to Hong Jun and Suzhen.

But the SNOD here is problematic. IRS wants to stick Hong Jun with the whole gross income, or in the alternative do a community-property split between Hong Jun and Suzhen. The problem is, the 2553 shows Hong Jun owned 40% of Younique’s stock, but the remainder is split 30% and 30% between two unnamed nonparties.

Howbeit, the 1120s do show expenses, and Hong Jun claims Younique lost money and subsequently cratered.

IRS wants summary J on the tax status of Younique as an S Corp (granted), and on the deficiencies, add-ons, and chops (denied).

“Proceeding pro se, petitioners in their petition did not dispute the RA’s numbers. But the Forms 1120 attached to their responses show different revenue figures for YCI (on a fiscal year basis). The RA allocated 100% of YCI’s gross income to petitioner husband, but the Form 2553 shows him as owning only 40% of YCI’s shares. There is no evidence in the current record to show that the ownership interests changed. Taking these facts together, and making allowances for petitioners’ pro se status, we conclude that the determination of YCI’s gross income for [years at issue] (and petitioners’ pro rata shares of its income) should be reserved for further proceedings.

“The RA allowed no deductions for cost of goods sold or the expenses incurred in operating the restaurant. The burden of proving entitlement to deductions and credits is on petitioners. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). The Forms 1120 attached to their responses allege that YCI incurred significant costs for (among other things) food, rent, wages, and utilities, allegedly generating losses for both years. It is obvious that the restaurant incurred expenses, and we think petitioners should have the opportunity to prove what they were. Their liability for a penalty for [Year One] and for additions to tax for [Year Two] likewise raises factual questions.” 2021 T. C. Memo. 136, at p. 12.

Business operating numbers rarely make good grist for the summary J mill.

*Hong Jun Chan and Suzhen Mei 2021 T C Memo 136 12 1 21

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