October 21, 2006
Tax Court: S Corp Election Outlasts Marriage
Joe Kristan flagged an interesting decision from the Tax Court this week: Sweeney v. Commissioner, T.C. Summ. Op. 2006-169 (10/19/06). Husband and Wife were each 50% shareholders of an S Corp that earned $18,627 of net income in 2002. The IRS assessed a deficiency against Husband for not reporting his $9,314 share as reported on his K-1. Husband's defense was that marital discord (they were later divorced) prevented him from accessing the money:
This is my whole argument, Your Honor. During the second week of January 2002, my wife proceeded to throw me out of my home, which is where the business was located. She changed the locks. She stripped our corporate bank accounts, our personal bank accounts, charged up all the cash she could on my credit cards to over $50,000, $60,000, and she physically, lock, stock, and barrel, locked me out of the corporation.
Although Judge Couvillion was sympathetic, he sustained the IRS's determination:
Although it is obvious to the Court that petitioner and his spouse had serious differences between them, this Court is not the proper forum for the resolution of these differences. All formalities of the Internal Revenue Code were followed with respect to the S corporation for the year 2002, and the distributive share of that income to petitioner constitutes taxable income to him.
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