Taxable Talk

When an S corporation has a loss, the loss flows through to its' shareholders. But shareholders can only take the loss if they have a basis in the corporation; the basis is (in general) the shareholder's share of the profits (to date), plus his share of the capital and his share of any loans made to the corporation.

In order for a shareholder to increase his basis in an S corporation, the shareholder must make a real outlay; as the Tax Court stated today,

"...to satisfy this requirement, even in circumstances where the taxpayer purports to have made a direct loan to the S corporation, the taxpayer must show that the claimed increase in basis was based on “‘some transaction which when fully consummated left the taxpayer poorer in a material sense.’” Bergman v. United States, 174 F.3d 928, 932 (8th Cir. 1999) (quoting Perry v. Commissioner, 54 T.C. 1293, 1296 (1970), affd. 27 AFTR 2d 71-1464, 71-2 USTC par. 9502 (8th Cir. 1971)); see Hitchins v. Commissioner, 103 T.C. 711, 715(1994). This doctrine ensures that the transaction has some economic substance beyond the creation of a tax deduction. Oren v. Commissioner, 357 F.3d 854, 857 (8th Cir. 2004), affg. T.C. Memo. 2002-172." [Kaplan v. Commissioner, T.C. Memo 2005-218]

In the case decided today, an owner of multiple S corporations took out a bank loan, then "loaned" one of his S corporations money which loaned another S-corporation....The Tax Court decided that there was no economic basis for the transactions and sustained the IRS' determination of a loss with no basis. Additionally, the petitioner claimed legal fees but had no back-up documentation; he lost that argument, too.

Case: Kaplan v. Commissioner, T.C. Memo 2005-218

There are traffic accidents and then there are traffic accidents. A courier transporting approximately 30,000 1040-ES payments lost his load on the San Mateo Bridge...and the payments fell into the San Francisco Bay. The accident occurred on September 11th and could impact any taxpayer mailing payments to the IRS' San Francisco lockbox.

If you mail payments to PO Box 510000 in San Francisco and it could have been received on or about September 11th, then check your next bank statement to see if your payment clears. If it does, then you have nothing to worry about. If it doesn't, then you may need to send in a replacement payment. If you're one of our clients, contact us if you're one of the unlucky taxpayers whose payments are now sleeping with the fishes.

This is why we strongly urge using certified mail, return receipt requested (and electronic filing/payments) for all correspondance sent to any tax agency. This puts the onus on the government, not you, regarding receipt of your payment. If your payment ended up in the bay and you have your mailing receipt and return receipt, you may have to go through a minor hassle with a second payment. But if you just mailed in your payment and it's lost, good luck with your fight with the IRS.

Hat tips: Roth Tax Updates, TaxProf Blog

IRS Commissioner Mark Everson announced on Friday that the standard mileage rate would increase to 48.5 cents/mile from 40.5 cents/mile, effective September 1st. Other mileage rates:

Moving expenses: $0.22/mile, up from $0.15/mile
Charitable work: $0.14/mile (set by statute).

Hat tip: Tax Analysts