Steven Jacobowitz, T. C. Memo. 2023-107, filed 8/16/23, learns the hockey players’ watchword from Judge Tamara Ashford.

Steve had a single-member CT LLC, but he never filed Form 8832 or otherwise followed Reg Sections 301.7701-1 through 301.7701. Steve never checked the box electing corporate tax status for the LLC. Therefore, when Steve defaulted on the line of credit he had taken out for the LLC, the lending bank filed Form 1099-C.

The bank did check the box, the one that says “the reason for the discharge was ‘Statute of limitations or expiration of deficiency period.’” T. C. Memo. 2023-107, at p. 3.

Wherefore, (1) the LLC was disregarded and the COD was income to Steve, and (2) Reg Section 1.6050P-1(b)(2)(i)(C) makes expiry of SOL for collection of a debt an identifiable event making the debt uncollectible and therefore canceled.

Steve’s argument that the debt was the debt of the LLC and not his, as he never guaranteed the debt, may be OK by CT law, but Federal law determines taxation. While some entities are mandated to be corporations, single-member LLCs are disregarded unless the member checks the box.

And that he stopped paying on the line of credit years before, and left some furniture for the bank to grab, avails not, as an identifiable event must happen to end liability for the debt (hence cancellation, even if involuntary). And no proof about the furniture, its worth, or that Steve told the bank to take it, or the bank agreed, so Steve can’t claim capital gain for selling the furniture to the bank in exchange for forgiving the debt.

But I do give Steve’s trusty attorney a Taishoff “Good Try” for that move, and for claiming that part of the canceled debt was accrued interest, which should have been deductible as a business expense.

Judge Ashford brushes that one off: ” Petitioner offered no evidence at trial that the…interest, which accrued after the last principal payment was made with respect to the line of credit, would have been an ordinary and necessary business expense. Statements in a party’s brief, such as petitioner’s assertion regarding the interest, are not part of the evidentiary record. See Rule 143(c) (‘[S]tatements in briefs . . . do not constitute evidence.’)… Indeed, the evidentiary record unmistakably shows that [LLC] stopped doing business in 2008 and that 2009 was the last year that [LLC’s] income (or loss) was reported to the IRS, before the interest started accruing in 2010.” T. C. Memo. 1023-107, at p. 10. (Citation omitted).

Check or be checked.