Flickr Image by Joe Shlabotnik under Creative Commons License
The futile and wasteful homebuyer credits are history, except for cleaning up the messes in court. The Tax Court yesterday ruled that two sets of homebuyers foot-faulted their way out of their credits — one by by having their corporation buy their house, and one by using an LLC.
The S corporation case involved a Nevada home through their Wyoming S corporation, ”Santsu,” which also owned rental properties that the couple operated. The tax court takes up the story:
Sanstu was the legal owner of the property. The property was petitioners’ principal residence. Petitioners had not owned another principal residence during the prior three years.
Petitioners claimed the $8,000 tax credit on their Form 1040, U.S. Individual Income Tax Return, for 2009. Sanstu did not claim the tax credit on its Form 1120S, U.S. Income Tax Return for an S Corporation, for 2009. Respondent issued a deficiency notice to petitioners, disallowing the tax credit.
The court said that didn’t work because the tax law allowed the credit only to “individuals” (Citations omitted, emphasis added):
We hold that S corporations are not individuals for purposes of section 36. A corporation, at its core, is a business entity organized under State or Federal law, whether an association, a company or another recognized form. A corporation that satisfies certain criteria may elect small business status for Federal income tax purposes. An S election does not alter the corporation’s corporate status; it merely alters the corporation’s Federal tax implications. Items of income, deduction, loss and credit generally pass through to the shareholders. S corporations remain freestanding entities “independently recognizable” from their shareholders. Individual taxpayers, on the other hand, are subject to tax under section 1, which sets rates for married and unmarried individuals, heads of households, and estates and trusts. A corporation’s income is not subject to tax under section 1. Rather, tax is imposed on corporate income under section 11. Accordingly, corporations are not individuals within the meaning of section 1.
As an extra kick in the teeth for the taxpayers, apparently an IRS representative had told them it was OK to use the S corporation. Tough, says the court:
It is unfortunate when a taxpayer receives inaccurate information. We have recognized, however, that incorrect legal advice from an IRS employee does not have the force of law and cannot bind the Commissioner or this Court.
If there’s real money at stake, don’t take the word of some IRS person on the phone. Get it in writing or get professional help.
The LLC Case involved the purchase of a New Jersey residence by “Jacco,” a family LLC owned by the taxpayers and their four children. Using similar reasoning as in the S corporation case, the court said that the taxpayers were out of luck because the LLC is not an individual. The taxpayer tried another way around, saying that the LLC should be disregarded as the “alter ego” of the taxpayers. No go, said the court:
Petitioners contend that Jacco was actually their alter ego and, therefore, should be disregarded for purposes of deciding whether petitioners are entitled to claim the first-time homebuyer credit personally. By contending that Jacco was their alter ego, petitioners seek to have the Court pierce the corporate veil. Respondent contends that, pursuant to New Jersey law, an individual member has no interest in specific LLC property. Respondent further contends that New Jersey caselaw does not support petitioners’ veil-piercing theory.
In the absence of fraud or injustice, New Jersey courts generally will not pierce the corporate veil. As the New Jersey Supreme Court has explained, the “purpose of the doctrine of piercing the corporate veil is to prevent an independent corporation from being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law”. Even where the corporation7 has no separate existence and the corporate form has not been respected, New Jersey courts will pierce the veil only where the corporation has been used to perpetuate a fraud or other injustice… Neither party contends that Jacco’s corporate form has been used to perpetuate some fraud or injustice, and the record does not disclose any fraud or injustice that would cause us to disregard the existence of Jacco. Accordingly, petitioners are not entitled to claim the first-time homebuyer credit on the basis of their alter ego theory.
The result should be different if the reseidence were purchased by a single-member LLC, which is normally ”disregarded” from its owner under the tax law. The multiple owners of the entity presumably prevented that here, but the court didn’t say so specifically.
Cites:
S corporation case: Trugman, 138 T.C. No. 22
LLC Case: Rospond, T.C. SUmm. Op. 2012-47
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
