The case made me think of Dave, a friend from long ago
– one of those relationships that sometimes surrenders to time, moving and
distance.
Dave was going to become a real investor.
That was not his day job, of course. By day he was a
sales rep for a medical technology company. And he was good at sales. He almost
persuaded me to join his incipient real estate empire.
He had come across one of those real estate gurus – I
cannot remember which one – who lectured about making money with other people’s
money.
There was even a
3-ring binder or two which Dave gave me to read.
I was looking over a recent case decided by the Tax
Court.
The case involved an engineer (Eason) and a nurse
(Leisner).
At the start of 2016 they owned two residential
properties. One was held for rent; the other was sold during 2016.
COMMENT: Seems to me they were already in the real estate business. It was not a primary gig, but it was a gig.
Eason lost his job during 2016.
A real estate course came to his attention, and he
signed up – for the tidy amount of $41,934.
COMMENT: Say what?
In July 2016 the two formed Ashley & Makai Homes
(Homes), an S corporation. Homes was formed to provide advice and guidance to
real estate owners and investors. They
had business cards and stationary made and started attending some of those $40
grand-plus courses. Not too many, though, as the outfit that sponsored the
courses went out of business.
COMMENT: This is my shocked face.
By 2018 Eason and Leisner abandoned whatever hopes
they had for Homes. They never made a dime of income.
You know that $40 grand-plus showed up on the S
corporation tax return.
The IRS disallowed the deduction.
And tacked on penalties for the affront.
This is the way, said the IRS.
And so we have a pro se case in the Tax Court.
Respondent
advances various reasons why petitioners are not entitled to any deductions …”
The respondent will almost always be the IRS in these
cases, as the it is the taxpayer who petitions the Court.
And we have discussed “pro se” many times. It
generally means that a taxpayer is representing himself/herself, but that is
not fully accurate. A taxpayer can be advised by a professional, but if that
professional has not taken and passed the exam to practice before the Tax Court
the matter is still considered pro se.
Back to the Court:
… we
need to focus on only one [reason].”
That reason is whether a business had started.
Neither Homes nor petitioners reported any income from a business activity related to the disputed deductions, presumably because none was earned.”
This is not necessarily fatal, though.
The absence of income, in and of itself, does not compel a finding that a business has not yet started if other activities show that it has.”
This seems a reasonably low bar to me: take steps to
market the business, whatever those words mean in context. If the context is to
acquire clients, then perhaps a website or targeted advertising in the local real estate
association newsletter.
Here, however, the absence of income coupled with the absence of any activity that shows that services were offered or provided to clients or customers […] supports respondent’s position that the business had not yet started by the close of the year.”
Yeah, no. The Court noted that a business deduction
requires a business. Since a business had not started, no business deduction
was available.
The Court disagreed with any penalties, though. There
was enough there that a reasonable person could have decided either way.
I agree with the Court, but I also think that just a
slight change could have changed the outcome in the taxpayers’ favor.
How?
Here’s one:
remember that Eason and Leisner owned a rental property together?
What if they had broadened Homes’ principal activity
to include real estate rental and transferred the property to the S
corporation? Homes would have been in business
at that point. The tax issue then would have been expansion of the business, not
the start of one.
Our case this time was Eason and Leisner v
Commissioner, T.C. Summary Opinion 2024-17.
