Attorney-at-Law

SWANETTE’S WAY

In Uncategorized on 03/09/2022 at 16:15

Far more straightforward than Proust is the story of Robert Ward, Jr., and Swanette Triem Ward, T. C. Memo. 2022-19, filed 3/9/22. Swanette was a painter, but not of abstracts, landscapes, or portraits; her C Corp did warehouses, multifamilies, and highrises.

The deficiency here is a big $4800, but Swanette’s trusty attorney (whom I’ll call Len) has paper and good witnesses, so gets a good result.

Judge Goeke: “Petitioners have substantiated the amounts of the disputed expenses, and the remaining issue is the business purpose of the expenses. The office equipment expenses relate primarily to the purchase of iPads, iPhones, a speaker, and related expenses for service plans and an accessory. Petitioners assert that Sherwin’s employees use these items in the performance of their jobs. On the basis of the record,  we accept petitioners’ assertion as to the business purpose and find that [C Corp] has substantiated the amount and business purpose of each expense.” T. C. Memo. 2022-19, at p. 3.

IRS gets their feet tangled over whether a $38K payment was a loan to Swanette from C Corp, hence a disguised dividend, and when it looks like they goofed, they doubled down. This is a highly dangerous maneuver. Judge Goeke doesn’t buy it.

“However, [C Corp] records establish that the return reported that the loan was made from Mrs. Ward to [C Corp]. Respondent refuses to concede his error and instead argues on brief that the disallowed business expense deductions should be treated as constructive dividends to Mrs. Ward. We reject this new position. There is no relationship between the disallowed expenses and the amount of the purported constructive dividends determined in the Wards’ notice of deficiency. [C Corp]’s failure to substantiate the business purpose of the disallowed deductions does not render the amount a constructive dividend under the circumstances of these cases. There is no indication that the Wards received an economic benefit from the amount of disallowed expenses. Accordingly, we hold that the Wards did not receive any unreported dividends from [C Corp].” T. C. Memo. 2022-19, at p. 4.

But Len can’t help when Bob and Swanette paid for Lucas to take a coding course at Northwestern U. True, Lucas did do coding work for C Corp, fluffing up the website and doing other coding, but never was paid therefor. And there is no agreement anywhere about what Lucas would give back in exchange for the free ride. Of course, when Lucas started the course he was dating Rob’s and Swanette’s daughter. And he married her after.

“While [Lucas] has provided services to [C Corp] free of charge that would have likely cost Sherwin more than the amount of the tuition, we nevertheless find that petitioners have not established that [C Corp] is entitled to deduct the tuition. [Lucas] was not an employee of [C Corp]. The Wards did not have an agreement with [Lucas] that he would perform any services in exchange for the tuition payment. [C Corp] paid the tuition without any expectation of a return and thus did not have a business purpose for the payment. The tuition was a personal expense, and [C Corp] is not entitled to deduct it.” T. C. Memo. 2022-19, at pp. 3-4.

My wily readers will doubtless have exclaimed that Rob and Swanette were better off with gift treatment than deductible tuition-as-salary-and-wages, because no FICA/FUTA/ITW, or income to son-in-law Lucas. Although maybe the years at issue were closed as to Lucas even assuming substantial understatement 6SOL, still going for the deduction was really a bridge too far.

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