Tax Court In Brief | Ismail v. Comm'r | Foreign LLC For U.S. Tax Purposes; Substantiation Of Schedule C Expenses; Section 274

• Jurisdiction: United States,Federal
• Law Firm: Freeman Law
• Subject Matter: Tax, Tax Authorities
• Author: Freeman Law
• Published date: 06 January 2023

The Tax Court in Brief - December 26th - December 30th, 2022

Freeman Law's "The Tax Court in Brief" covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation: The Week of December 26th, 2022, through December 30th, 2022

• Smith v. Comm'r, 159 T.C. No. 3 August 25, 2022| Toro, J. | Dkt. No. 5191-20
• Luu v. Comm'r, T.C. Memo. 2022-126| December 28, 2022 | Weiler, J. | Dkt. No. 714-20W
• Kechijian v. Comm'r, T.C. Memo 2022-127| December 28, 2022 | Gustafson, J. | Dkt. No 3430-20

Intan N. Ismail & Mohd Razu Abd Rahim v. Comm'r, T.C. Memo 2022-113 November 29, 2022| Paris, J. | Dkt. No. 16366-16, 13297-18

Short Summary: The case discusses the tax classification of a foreign corporation for U.S. tax purposes and the substantiation of various business expenses such as vehicle, travel, and meals and entertainment expenses.

Mrs. Ismail and Mr. Rahim (petitioners) filed joint tax returns for the 2012-2015 period. Mr. Rahim was employed by RNR, a limited liability company organized according to the laws of Malaysia. RNR was founded by Mr. Rahim's father and Mr. Nordin, and all the members of such company had limited liability. In 2013, petitioners became directors of RNR, but there was no documentation to support that petitioners became members of RNR. Also, there was no evidence to support that RNR filed form 8832, Entity Classification Election to be treated as a disregarded entity.

Petitioners claimed RNR business expenses on their Schedule C during 2012-2015 period. The IRS disallowed such expenses claiming that RNR constituted a foreign corporation and not a disregarded entity. The IRS issued a notice of deficiency for the 2012-2015 period disallowing the business expenses claimed. For 2015, the IRS partially disallowed only expenses related to vehicle, travel, and meals and entertainment expenses.

The Tax Court ruled in favor of the IRS by determining that RNR constituted a foreign corporation and not a disregarded entity for tax purposes. Consequently, the expenses of RNR could not be claimed on petitioners' schedule C.

Key Issues: The proper classification of a Malaysian limited liability company for U.S. tax purposes and, the substantiation of vehicle, travel, and meals and entertainment expenses incurred by petitioners.

Primary Holdings: A Malaysian limited...