P owned shares in an S corporation and in 2000 personally guaranteed a line of credit to the corporation. The S corporation incurred losses in 2003, and P deducted $ 199,141 of those losses on his 2003 income tax return. In March 2004 P personally took out a loan and paid off the corporation's line of credit in the amount of $ 150,174. The IRS disallowed the 2003 loss on the grounds that P had insufficient basis in the S corporation and determined a tax deficiency, a late-filing addition to tax, and an accuracy-related penalty.
MEMORANDUM FINDINGS OF FACT AND OPINION
GUSTAFSON,
FINDINGS OF FACT
At the time they filed their petition, the petitioners resided in Minnesota. The following facts are based on Mr. Weisberg's testimony and the four exhibits that were offered into evidence.
In the year in issue, Mr. Weisberg was an attorney. He was a shareholder (apparently the 100-percent shareholder, though the record is not clear) of Weisberg & Associates, an S corporation through which he practiced law.
In February 2000 (i.e., 2010 Tax Ct. Memo LEXIS 55">*58 before the year in issue), Firstar Bank issued a $ 200,000 line of credit to Weisberg Personal Injury Lawyers, P.A., which we assume to be a predecessor to Weisberg & Associates. Mr. Weisberg personally guaranteed repayment of the loan. The proceeds of that line of credit were used for business expenses of Weisberg & Associates. Weisberg & Associates incurred losses in 2003, of which Mr. Weisberg's share was $ 199,141.
As of March 2004 Weisberg & Associates owed $ 150,174.21 on the Firstar line of credit. In that month Mr. Weisberg personally borrowed $ 250,000 from Bremer Bank and used $ 150,174.21 of the loan proceeds to pay off Weisberg & Associates' Firstar line of credit.
In 2004 Mr. Weisberg received extensions of time to file the petitioners' Federal income tax return for the year 2003, and it was due to be filed October 15, 2004. An accounting firm prepared the Federal income tax return, and it was filed on November 29, 2004. The return reported income from a variety of sources but claimed from Weisberg & Associates a loss of $ 199,141, which reduced the total taxable income that otherwise would have been reported. The return reported a total tax due of $ 99,760.
In its notice 2010 Tax Ct. Memo LEXIS 55">*59 of deficiency issued in June 2007, the IRS disallowed the Weisberg & Associates loss on the grounds that "Your flow-through loss from your S Corporation is limited to your basis." (Neither in the notice of deficiency nor in this lawsuit did the IRS dispute the underlying deductions of Weisberg & Associates that gave rise to the claimed loss.) The notice of deficiency determined a total corrected tax liability of $ 200,563 and a consequent deficiency of $ 100,803.
In September 2007 Mr. Weisberg and Ms. Peterson timely filed their petition disputing that deficiency.
OPINION
The IRS's deficiency determinations are generally presumed correct; and Mr. Weisberg, as a petitioner in this case, has the burden of establishing that the determinations in the notice of deficiency are erroneous. See
Subchapter S of the Code provides that a qualifying small business corporation that makes the proper election (referred to as an "S corporation",
However, an S corporation shareholder may not claim a loss deduction greater than his basis in the S corporation,
The record 2010 Tax Ct. Memo LEXIS 55">*61 contains no information concerning Mr. Weisberg's basis in Weisberg & Associates before 2000. In that year he personally guaranteed a line of credit for the firm. Under certain conditions, debt can contribute to a shareholder's basis in an S corporation, but those conditions are not satisfied here. As we stated in This court has held that mere shareholder guaranties of S corporation indebtedness generally fail to satisfy the requirements of
In March 2004 Mr. Weisberg incurred his own personal loan and used it to pay off the firm's line of credit. We may assume, for argument's sake, that by that act he did increase his basis in the S corporation by $ 150,174. However, the year in issue here is 2003, and that act in March 2004 did not increase his basis in 2003. Consequently, Mr. Weisberg has not shown that he is entitled to claim any portion of the loss in 2003. (
Mr. Weisberg's return reported a total tax due of $ 99,760; the notice of deficiency (which we have upheld on the only point in dispute) determined a liability (i.e., "the tax required to be shown on the return") of $ 200,563; and the resulting deficiency in tax is $ 100,803. Since 10 percent of the tax required to be shown is $ 20,056, the underpayment is well in excess of that amount, and respondent has thus carried his burden, under
A taxpayer who is otherwise liable for the accuracy-related penalty may avoid the liability if he successfully invokes one of three other provisions:
The third provision available to a taxpayer who resists the accuracy-related penalty is
To reflect the foregoing,
1. Unless otherwise indicated, all citations of sections refer to the Internal Revenue Code of 1986 (the Code, 26 U.S.C.), as amended, and all citations of Rules refer to the Tax Court Rules of Practice and Procedure.↩
2. The notice of deficiency was not offered into evidence. However, a copy of it was attached to the petition; and though respondent's answer alleged an omission of two pages (Form 4089-B, Notice of Deficiency -- Waiver), the omission is not material, and respondent otherwise alleged the same document to be the notice of deficiency. Consequently, the notice of deficiency is judicially admitted, and "Judicial admissions 'eliminate the need for evidence on the subject matter of the admission,' as admitted facts are no longer at issue."
3. The parties stipulated that Ms. Peterson is entitled to relief from joint liability pursuant to
