Category: Corporations Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com After considering this matter and doing some research, it became clear to me that what we have is purely a question of fact: are the activities in question those of the corporation or of the shareholder? Case law is of little use to us in this situation. In my opinion, the task is to get the agent and/or the supervisor to understand that there is a question of fact and then get them to see the facts in a way that is positive to the taxpayer. If you feel the need, there are a couple of cases that say a corporation is not recognized for tax purposes unless it engages in some level of business activity. In my view, if we could make our case on that account, we would not need the cases in the first instance. If the corporation has no activity, it follows that the activity in question is that of the shareholder, not the corporation. In any event, if you want to cite these cases, let me know. I have composed a communication that you may wish to incorporate into a letter to the IRS, or at least use the logic in your oral arguments. If you wish to use this in a letter, I can provide the text in electronic form in order to avoid retyping. Please let me know your requirements. Ordinarily, a taxpayer will not be permitted to ignore a corporate entity for his own tax advantage. Because the taxpayer formed the corporation of his own volition, he must normally live with the tax consequences of that choice. See, for example, National Carbide Corp v. Com., (1949, S Ct) 37 AFTR 834, 336 US 422, 93 L Ed 779, 49-1 USTC ¶9223; U.S. v. Morris and E.R. Co, (1943, CA2) 31 AFTR 54, 135 F2d 711, 43-1 USTC ¶9432, cert den(1943, S Ct) 320 US 754, 88 L Ed 449; Inness, Robert, (1968) TC Memo 1968-120, PH TCM ¶68120, 27 CCH TCM 567, remd(1969, CA5) 23 AFTR 2d 69-1662, 24 AFTR 2d 69-5309, 413 F2d 290, 69-2 USTC ¶9472; Burr, Jack, (1966) TC Memo 1966-112, PH TCM ¶66112, 25 CCH TCM 592; Burgess, T. David, (1981) TC Memo 1981-131, PH TCM ¶81131, 41 CCH TCM 1127; and Higgins v. Smith, John T., (1940, S Ct) 23 AFTR 800, 308 US 473, 84 L Ed 406, 40-1 USTC ¶9160.
It is important to understand that the taxpayer in this matter does not seek to upset the well-established principle that a corporate entity cannot easily be ignored. The taxpayer does not wish to pierce the corporate veil. The Government's whole premise in this matter is that a corporation is a legal entity separate from its owner. Accordingly, corporate-level activity must be taxed to the corporation, not the shareholder. The taxpayer has no quarrel with this premise, but the premise must cut both ways. If it is true that... · a taxpayer cannot be permitted to easily ignore the existence of a corporation he has formedin other words, except under extraordinary circumstances corporate activities will not be taxed to the shareholder; then it must also be true that... · except under extraordinary circumstance, shareholder-level activities will not be taxed to his corporation. In this matter, there is an important question of fact that is being overlooked: are the activities in question those of the corporation or of the shareholder? It is clear that the activities in question are those of the shareholder, not the corporation. When a corporation is formed, it is simply an empty legal entity into which assets and activities can be transferred. A corporate shell does not, by its mere formation, "absorb" a given activity of its shareholder/creator, even if the corporation was formed for that express purpose. The shareholder must either start a business in the name of the corporation or else transfer property or an existing business into it. Logically, this requires some type of overt act on the part of the shareholder. Stated another way, just because the taxpayer formed a corporation with the intention of starting a business in that corporate shell, it does not necessarily follow that the taxpayer made good on that intentions. Matters of taxation must be based on what one does, not what one contemplates. In this case the taxpayer did indeed form a corporation, Diamond Post, Inc. The taxpayer did indeed intend to operate his business out of this corporation, and to that end caused a telephone directory listing to be created in the corporate name. In the end, however, the taxpayer never consummated his intention. He operated the business, what little there was, as a sole proprietorship. Consider the following factors. · No corporate stock was ever issued. · No corporate bank account was opened. · All funds associated with the business were deposited into the taxpayer's personal checking account. All expenses were paid from the same source. · No taxpayer identification number was ever applied for. · No corporate tax return was ever filed. · There were no board meetings for Diamond Post, Inc. · No corporate books and records were established. This is not the picture of a corporation with a going business. This is the picture of a dormant corporation. The activities in question are those of the shareholder, not the corporation. To tax the corporation on these activities is to ignore the reality of the situation.  |