IRS tries to short-circuit the “primarily for the benefit of the shareholder” test by laying off all disallowed deductions on Benito Palmarini, a shareholder in Palmarini, Inc., T. C. Memo. 2022-119, filed 12/7/22. But Benito is not the largest shareholder, although he runs the corporation as its president, and writes off a lot of personal expenses from the corporation.                            

One can understand IRS’ frustration with Benito’s methods, or lack thereof. Palmarini, Inc., had no books and records.

“Palmarini Inc.’s disorganized recordkeeping (if it can be called recordkeeping) does not enable one to verify the business purpose and specific amounts paid for  ‘other’ expenses. His documents show a tangle of business and personal, of capital and ordinary, and of mixed lines of potential business. His information was in such disarray that he himself, preparing returns in the months after the close of the years at issue, was unable to determine with reasonable certainty his own deductible expenses, so he filed a series of amended returns claiming deductions inexplicably ‘not included’ in a return filed days before, or stating ‘[m]ore deductions found in Line 26’.” T. C. Memo. 2022-119, at p. 36.

To show a constructive dividend, the payment must be tied to the shareholder and shown to benefit the shareholder. The RA who did the bank account reconstruction had to drain a major swamp, but there were other shareholders who got money and did work for Palmarini, Inc. IRS is definitely behind the curve in tying disallowed deductions to Benito.

Although Benito filed seven (count ’em, seven) amended corporate income tax returns for Year One, and four amended returns for Year Two, he never filed FICA/FUTA, so Judge David Gustafson, obliging as always, reminds IRS that the SOL is open on that, T. C. Memo. 2022-119, at p. 30, footnote 17.

Judge Gustafson sorts out the constructive dividends, and Benito and IRS horsetrade most of the rest.

The Rule 155 beancount is going to be a beaut.