No, not the 1970 Paul Williams’ – Roger Nichols’ booster rocket for The Carpenters, rather this is the story of Kwaku Eason and Ashley L. Leisner, T. C. Sum. Op. 2024-17, filed 8/13/24.

Ashley and Kwaku tried to make it big in real estate by giving $41K to one of those teach-you-to-make-a-fortune-in-real-estate courses, which didn’t, and cratered off the launchpad. Incidentally, taking Kwaku’s and Ashley’s Sub S and $41K with them.

Kwaku and Ashley filed an 1120S and Sched C, when they should just have flowed through whatever tax incidents there were to their 1040 MFJ. But CSTJ Lewis (“That Name Is The Best Thing in This Post”) Carluzzo won’t bother with technicalities.

“To keep things simple, however, we ignore the technicalities that govern the federal income taxation of an S corporation and its shareholders and focus on petitioners’ entitlement to the deductions as though the deductions were properly reportable as trade or business expenses on the Schedule C included with the return.” T. C. Sum. Op. 2024-17, at p. 3.

Anyway, Kwaku and Ashley only had stationery and business cards printed in year at issue, by which time the make-a-fortune dudes had folded, leaving Kwaku and Ashley both uneducated and out of business.

Unfeeling IRS disallowed all of Kwaku’s and Ashley’s Section 162 deductions. IRS had reasons, but CSTJ Lew only considers that the Sub S wasn’t a business yet.

“More likely than not, [make-a-fortune’]’s failure to fulfil its contractual obligations to petitioners frustrated their intention to start the business they had expected to conduct through [Sub S]. Whatever the reason, petitioners have failed to demonstrate that they were carrying on a trade or business themselves or through [Sub S] by the close of [year at issue]. That being so, they are not entitled to the deductions claimed on the Schedule C, and respondent’s disallowance of those deductions is sustained.” T. C. Memo. 2024-17, at p. 4.

Worse, IRS wanted a Section 6662(a) five-and-ten chop.  And on the face of it, IRS has checked the boxes. But CSTJ Lew says “no, Kwaku and Ashley acted in good faith.”

“Unlike countless other cases where the imposition of a section 6662(a) penalty is supported, at least in part, by the taxpayer’s claiming deductions that could not be substantiated, here there is no dispute that the expenses to which the disallowed deductions relate were paid.”  T. C. Sum. Op. 2024-17, at p. 5.

Not making money in Year One of a new business isn’t conclusive that you’re not trying.

“Further, reasonable minds could differ over the point in time, and/or the specific actions that establish when a business not subject to a licensing obligation begins. The Internal Revenue Code touches on the point, but little guidance is offered. For example, section 195(c)(2) provides, in relevant part, that ‘the determination of when an active trade or business begins shall be made in accordance with such regulations as the Secretary may prescribe,’ but there are no such regulations.” T. C. Sum. Op. 2024-17, at p. 5.

Taishoff says maybe there are no regs because it’s all facts-and-circumstances; every story is different. But this story is sad enough for CSTJ Lew to cut Kwaku and Ashley a wee bit slack.

“Petitioners spent a considerable amount to enroll in [make-a-fortune]’s courses during [year at issue]. They had business cards and stationery printed during [year at issue]. But for the failure of Education to honor its contractual obligations to them, they might very well have taken additional actions to allow for a finding that the business started during [year at issue]. We are satisfied that they believed in good faith that it did. They are not liable for a section 6662(a) penalty.”

Takeaway: If you’re starting up, get whatever licensure you need, print those business cards and stationery (even if all you send out are texts and e-mails), save and annotate your receipts, credit card and bank statements; and open that business bank account, even if you don’t get a toaster any more. And tell ’em Kwaku and Ashley sent ya.