In Uncategorized on 11/29/2022 at 18:06

Entia non sunt multiplicanda sine necessitate” or “keep it simple, stupid” is a good rule to follow, especially when creating business entities. Today’s Tax Court release features two (count ’em, two) such.

First up, Heather P. Dunn and Edison Dunn, T. C. Memo. 2022-112, filed 11/29/22. Heather and Edison each separately run one real estate operation, and also formed an LLC, which they owned together, to acquire and manage another. But they both have full-time non-real estate jobs, and dodgy time logs for their material participation in the real estate. The LLC had first an on-site agent (Heather and Ed lived 150 miles away) and then a managing agency. What they didn’t have was a Section 469(c)(7)(A) coverall, grouping all their real estate into one activity. This might have saved their real estate pro status. Heather tried to write off her individually owned automobile on the LLC’s return; “Petitioners failed to explain why [LLC] should be entitled to deductions for property it did not own.” T. C. Memo. 2022-112, at p.4.

It doesn’t get better.

Next, Intan N. Ismail & Mohd Razi Abd Rahim, T. C. Memo. 2022-113, filed 11/29/22, claim passthrough deductions from Daddy’s RNR Sendirian Berhad, which is Malaysian for LLC. Except they never showed they owned any interest in said LLC, until in response to an IRS challenge, they produced a “share-swap” agreement that said that In & Mohd would acquire the shares some time after the years at issue. And they backed that up with more paper.

Judge Paris: “During the course of the litigation, Dr. Rahim provided a revised directors’ report for fiscal [Year One] that listed him as owning half the shares of RNR and a directors’ report for the previous fiscal year purporting to reflect his purchase of 250,000 shares of RNR. Given Dr. Rahim’s easy access to the directors’ reports, and ability to influence the contents thereof, and without other evidence to support his purported ownership of RNR, we do not find the revised directors’ report to be credible.

“Neither have petitioners provided any evidence that Dr. Rahim and Mr. Nordin exercised the share swap agreement before the relinquishment date set forth by the express terms of the contract.” T. C. Memo. 2022-113, at p. 8.

And RNR never filed Form 8832, Entity Classification Election, the famous “check-the-box”, electing passthrough status, or Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs). In and Mohd listed RNR’s address as Overland Park, KS, and not Malaysia, on the Schedule Cs they filed whereon they reported the losses from RNR.

Watch those entia.


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