February 10, 2020
Taxpayer held several business entities:
1. Sole Proprietorships - Schedule C _Commercial Construction and Remodeling
2. S Corp - Pinnacle _ Cast Stone Manufacturing for which Taxpayer is Majority Shareholder.
3. C Corp - RFI _ General Contractor for which Taxpayer is an Employee.
A.) Homeowner complains that quality of work done regarding cast stone project and construction was not adequate; 2011 settlement has taxpayer paying homeowner a settlement check drawn on personal funds. Taxpayer records check payment on the books of S Corp (Pinnacle) as a loan from taxpayer to S Corp, without drawing loan documents. In 2012, S Corp (Pinnacle) has no income and is shut down later in the year. Pinnacle claims a deduction on S Corp with losses flowing into Taxpayers 1040. IRS denies the losses because it states that the S Corp did not pay the settlement amount; it states the Taxpayer paid the settlement amount with his personal funds as a an employee of the C Corp (RFI).
B.) Taxpayer then asserts that he may deduct the settlement payment on Schedule C of the 1040, because it was paid to protect the reputation of all of his businesses. Tax court then focuses on the origin of the loss: Was it as a business entity or an employee activity?
Court then decides that the claim is to be only directed to the C and S Corp businesses, and 50% of the settlement amount is allocated to each the C and S Corp: 50% of the payment is allocated as a capital contribution to the S Corp and deductible by the S Corp; 50% of the payment is allocated as not deductible by the C Corp, but as an unreimbursed employee business expense deductible by the taxpayer as an itemized deduction on Schedule A and not part of AGI.
C.) The years of activity for this case are 2011-2012. Present tax law has discontinued the deduction of employee business expenses on Schedule A.
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