Tax Court In Brief | Simpson V. Comm'r | Deficiencies For Unsubstantiated Expenses; Accountable Reimbursement Plans; And Basis In LLC

• Jurisdiction: United States,Federal
• Law Firm: Freeman Law
• Subject Matter: Tax, Income Tax
• Author: Freeman Law
• Published date: 17 January 2023

Tax Litigation: The Week of January 9th, 2022, through January 13th, 2023

• Wondries v. Comm'r, T.C. Memo. 2023-5| January 9, 2023 | Kerrigan, J. | Dkt. No. 13345-19 (deficiencies for deduction of farm and ranch expenses evaluation of activity not engaged in for profit).
• Vassiliades v. Comm'r, T.C. Memo 2023-1 | January 9, 2023 | Panuthos, J. | Dkt. No 12283-20S.
• Decrescenzo v. Comm'r, T.C. Memo 2023-7| January 12, 2023 | Halpern, J. | Dkt. No 16784-18

Simpson v. Comm'r, T.C. Memo. 2023-4| January 9, 2023 | Jones, J. | Dkt. No. 16923-16

Summary: Kyle Simpson and Christen Simpson, husband and wife (the Simpsons), were equal shareholders in a wholly owned S corporation (S Corp). Through S Corp, Mr. Simpson developed open-source software. He was also employed by three different software development companies. In 2011, as S Corp grew, Mr. Simpson started phasing out his other work. S Corp maintained a corporate checking account, a corporate savings account, and two corporate credit cards. Mr. Simpson also participated in the formation of an LLC (LLC) business that rented communal office space. Mr. Simpson, acting as S Corp's agent, caused S Corp to join with two other entities to form LLC; each member contributed $2,500 in cash to LLC's business bank account at the LLC's outset in July 2011. S Corp served as LLC's operating manager and as LLC's registered agent. LLC ultimately failed.

The Simpsons timely filed a joint Form 1040 for their taxable year 2011. The return included Schedule E, Supplemental Income and Loss, with respect to their involvement in S Corp and LLC. The Simpsons reported losses from S Corp and income from LLC, for a total loss of $60,491. On its Form 1120-S, U.S. Income Tax Return for an S Corporation, for taxable year 2011, S Corp reported itemized expenses and "other deductions" that included auto, travel, gifts, supplies, home office rent, and other.

For tax year 2012, the Simpsons filed a joint Form 1040 on August 12, 2014. Similar to the returns filed for 2011, the Form 1040 included Schedule E with respect to S Corp, and S Corp's 2012 Form 1120-S included similar deductions. S Corp also reported an ordinary loss and a section 1231 loss, both of which were associated with S Corp's interest in LLC.

For tax year 2013, the Simpsons filed a joint Form 1040 on April 28, 2015. Similar to the returns filed for 2011 and 2012, the Form 1040 included Schedule E with respect to S Corp, and S Corp's 2012 Form 1120-S included similar deductions.

In 2012, the IRS began an investigation of Spectrum Financial (Spectrum), the provider of tax services that prepared S Corp's corporate returns and the Simpsons' personal returns. The IRS' investigation of Spectrum encompassed examinations of Spectrum's clients' returns, including those of S Corp and the Simpsons. The IRS issued to the Simpsons two notices of deficiency. The first notice of deficiency, regarding taxable years 2011 and 2012. The IRS also determined accuracy-related penalties under section 6662(a) for taxable years 2011 and 2012, as well as a failure-to-timely-file addition to tax under section 6651(a)(1) for taxable year 2012. The second notice of deficiency regarded taxable year 2013. The IRS also determined an accuracy-related penalty under section 6662(a) and a failure-to-timely-file addition to tax under section 6651(a)(1). The Simpsons challenged the determinations.

Key Issues:

(1) Whether certain deductions claimed by the Simpsons wholly owned S corporation are properly deductible at the corporate level or, alternatively, as expenses incurred by Mr. Simpson as a Getify employee?

(2) Whether items underlying the Simpson's claimed deductions have been substantiated?

(3) Whether the Simpsons substantiated Getify's basis in South Austin Co-Working, LLC (Co-Working), so as to justify their purported loss deductions associated with that entity for taxable years 2011 and 2012?

(4) Whether the Simpsons are liable for accuracy-related penalties under section 6662(a) with respect to taxable years 2011, 2012, and 2013?

(5) Whether the Simpsons are liable for additions to tax associated with their failure to timely file tax returns under section 6651(a)(1) with respect to taxable years 2012 and 2013?

Primary Holdings:

(1) The deductions are...