I’ll forgive Judge Mark V (“Vittorio Emanuele”) Holmes a little lame humor in Short Stop Electric, Inc., T. C. Memo. 2023-114, filed 9/11/23. Bob, the majority stockholder in Short Stop, is an inventive type, so his story is worth some furbelows.

Short Stop was a C Corp, so double taxation. Bob decided to short circuit that (sorry, guys) by creating a “revolving line of credit” between himself and Short Stop, whereunder at year-end he’d note an advance on Short Stop’s books from him, and note a repayment with interest at a rate and amount determined solely by him. He’d pay tax on the interest he never got on his 1040 MFJ, but Short Stop’s 1120 would show minimal tax or a loss.

Bob was warned at an earlier exam that this was a dodge, but he seemed so earnest that the RA let it go. No good deed goes unpunished, so Bob kept right on with it. That earns him understatement chops.

Bob’s dicey loan to an unrelated fails for want of evidence; he claims Short Stop made the loan, but the borrower paid Bob. True, directing one who owes you to pay to one whom you owe is income to you, but there’s no showing of any of that. And the purchase of the cabin on the lake, ostensibly for future development, fails for want of proof of business use, as does the boat.

It’s true, as I once remarked, a sign of success is to own a boat. I never did.

And Short Stop’s NOLs get lost when the interest deductions it took get wiped out.

Fighting the chops, Bob’s CPA, though expert, has poor memory and no paper.

But Short Stop wins on the forklift, which survives even the Section 274 hurdle, although Bob’s poor recordkeeping limits him to 70% of the cost for his Section 179 deduction.

“The problem for Short Stop here is that we’ve found it to be a company that has taken unreasonable reporting positions for a long time, and after being warned not to do so by an IRS revenue agent. It had a competent adviser but didn’t rely on him for advice. So, even if other taxpayers might have been reasonable in deducting the cost of the equipment, Short Stop itself was unreasonable in not substantiating these deductions. The failure to track and substantiate in any way their varied uses was not reasonable here. We therefore find that the accuracy-related penalties apply for both years at issue.” T. C. Memo. 2023-114, at pp. 21-22. (Footnote omitted, but it says that even though Bob wins on the forklift, he kept no records allocating business use (he used the forklift to push a snowplow and most of that was personal) but deducted almost all of the forklift cost, hence the chops on the whole deduction, even though he gets 70% of the deduction itself).