Schedule C vs 1120

[Johnny]

I have a new client who formed a corporation (small landscaping business) in 2003 but never filed the corporate return nor his 2003 personal return. In the past he just filed a schedule C for the business. My question is should he just continue filing a schedule C for 2003 & 2004 or should he file an 1120 and 1040 for those years?

[Bees Knees]

It depends.

Did he transfer any assets to the corporation in exchange for stock?

If he did, were any of those assets owned by the sole proprietorship?


If he hasn't transferred any assets to the corporation yet, the corporation is not required to file a tax return.

[OldJack]

If he hasn't transferred any assets to the corporation yet, the corporation is not required to file a tax return.

TTB page 18-1: All domestic corporations in existence for any part of a taxable year must file a return whether or not the corporation has any taxable income, unless the corporation is exempt under IRC Code 501.

[Roberts]

past years

The first two years my corporation was in existance we had no employees, no assets, and no income.. I called the IRS to see whether I should file a return or not and the rep said "technically yes" but if all the numbers are zero - the IRS would prefer you not file and waste their time. The state wrote me asking for a return and I called and told them what the IRS said and they agreed and said I didn't need to file if all the numbers were zeros.

[BOB W]

Corporation

I believe every state has a minimum franchise fee and failure to file the state corporate return will only create late filing fees. I would suggest filing both the federal and state corporate returns for the years missed. Some states, like NY, may base minimum fees on certain conditions, like assets or payroll. In NY zero assets and/or payroll can cause a minimum franchise fee of $800 per year.

Be sure to check your local state's requirements................

[OldJack]

Ponder time

I agree with Bob W.

Remember, what the government says on the telephone doesn't mean anything as they themself will not recognize it as authority. The tax code clearly requires filing, also, you have a statute of limitation on those years that never expires unless you file a return. You have nothing to lose by filing other than the postage and time it takes to prepare.

If you don't prepare a return how do you justify charging your client for the time it took for you to ponder this problem?

[Bees Knees]

TTB page 18-1: All domestic corporations in existence for any part of a taxable year must file a return whether or not the corporation has any taxable income, unless the corporation is exempt under IRC Code 501.

I would contend that a corporation does not exist until someone transfers assets into it in exchange for stock. The sentence you quoted says "all domestic corporations in existence..."

I agree. Once a corporation exists, it must file a tax return every year. There are no minimum income requirements. But at what point does a corporation exist? Is it when you go down and file with the secretary of state? Or is it when assets are transferred in exchange for stock?

Can a corporation exist without any stockholders?

[OldJack]

Existence?

I would contend that a corporation does not exist until someone transfers assets into it in exchange for stock. The sentence you quoted says "all domestic corporations in existence..."

Bees Knees you know that the articles of incorporation or certificate has a "date of incorporation" printed right on it by the state office and that that is the legal date of existence [duh]. There is no issue on the date of existence regardless of how much stock, date of first transactions, or assets of the corporation. Maybe you are referring to the calculation of the deadline date for filing to be a S-corp status? The day the state says you have a corporation is the date of existence.

[Bees Knees]

IRS Pub 542 says the following:

Business formed after 1996. The following
businesses formed after 1996 are taxed as cor-
porations.

A business formed under a federal or state
law that refers to it as a corporation, body
corporate, or body politic.

A business formed under a state law that
refers to it as a joint-stock company or
joint-stock association.

An insurance company.

Certain banks.

A business wholly owned by a state or
local government.

A business specifically required to be
taxed as a corporation by the Internal Rev-
enue Code (for example, certain publicly
traded partnerships).

Certain foreign businesses.

Any other business that elects to be taxed
as a corporation by filing Form 8832.



Gee, I don’t see any mention in that list that filing papers with the secretary of state makes you subject to federal corporate taxation.

I do see a requirement that a business formed under a state law that refers to it as a corporation is taxed as such.

But what makes it a business?

A corporation is not a corporation for federal tax purposes until a business is incorporated. Its not a business if nobody transfers any business stuff into it.

[Bees Knees]

The original poster wanted to know if he should file a Schedule C for his client or if a corporation return is filed.

In the context of the client's landscaping business, NO, the landscaping business is not required to file as a corporation UNLESS business assets were transfered into the corporation in exchange for stock.

If you want to go ahead and file a bunch of 1120 returns with big fat zeros on them, fine. But the landscaping business is not a corporation until its assets are exchanged for stock.

[OldJack]

Outrageous

Talk about taking something out of context.. boy, Bees Nees your post on who/what is taxed as a corporation is really way off base as far as appropriate to the subject. You know better than that. That clip form pub 524 is simply clarifying those entities that are by statute a corporation verses those that are electing to be treated as a corporation and is not identifying what tax form they have to file or at what they had to do to become taxed as a corporation.

And your statement a corporation is not a corporation until it has assets for stock is outrageous. Check with the Secy of States office and you would find that during the first year of the corporation the state will show the corporation as "in good standing" or words to that effect depending upon the state.

I agree that the landscape business transaction MAY not be reportable under the corporation, however, that depends upon if the owner was holding the business out to be a corporation during the year of concerned transactions. Did the owner operate using invoices or checks that referred to the business as a corporation with the corporate name? If yes the income or expense is reportable by the corporation not Sch-C? Was the business operating bank account an account with the corporate name or federal ID#? You have to look at the facts and circumstances of all transaction rather than just conclude that no assets were exchanged for stock of the corporation. As a matter of fact stock could be issued in exchange for services rather than assets. The corporation may have taxable and reportable transaction without having properly issued its stock certificates. You know better.. so why are you being contrary and misleading this poster?

[Gretel]

Argue

You, Jack and Bees, are very good in arguing. Bet both of you defeat almost any IRS auditor. I wouldn't even be surprised if he audits one your (Jack's) clients and agrees with you and goes straight to one of Bees client's, same issue, and agrees with the opposite.
I am not bringing Armando in this picture. Wonder what going on between him and Bees in the office now?

Who ever said tax laws are boring.

Old Jack, you are a big challenge but I am glad you are with us.

[Bees Knees]

I agree that the landscape business transaction MAY not be reportable under the corporation, however, that depends upon if the owner was holding the business out to be a corporation during the year of concerned transactions. Did the owner operate using invoices or checks that referred to the business as a corporation with the corporate name? If yes the income or expense is reportable by the corporation not Sch-C? Was the business operating bank account an account with the corporate name or federal ID#? You have to look at the facts and circumstances of all transaction rather than just conclude that no assets were exchanged for stock of the corporation. As a matter of fact stock could be issued in exchange for services rather than assets. The corporation may have taxable and reportable transaction without having properly issued its stock certificates. You know better.. so why are you being contrary and misleading this poster?

You are definitely a type A personality. One who wants black and white rules. 2+2=4 and there is no debate.

The first guy I ever did taxes for is famous for making the statement: “Taxes are not an exact science.”

Old Jack,

You know as well as I do that the IRS will slice through a corporation faster than a blink of an eye if the corporation does not follow formalities. If you don’t do your corporate minutes, or have the T and I dotted in your promissory notes, they will disregard the corporation and tax you as an individual.

Well, it works both ways. The corporation is an entity. It requires legal procedures. If you don’t follow corporate formalities, you are treated as not being a corporation for federal income tax purposes.

If the guy never transferred his landscaping business to the corporation in exchange for stock, its not a corporation. Why can’t he say his landscaping business is a sole proprietor and he hasn’t gotten around to operating his corporation business yet? What law says the minute you incorporate, every sole proprietorship you own automatically gets sucked into the corporation?

Provide a citation; court case, revenue ruling, regulation…anything that says your sole proprietorship is automatically a corporation the minute you file with the Secretary of State? If it is automatic, why do you advise your clients to spend money seeing a lawyer? What good is all that legal bumbo jumbo if it is all just automatic?

[Bees Knees]

Corporate Formalities

In American Offshore, Inc. v. Commissioner, 97 T.C. 579, the corporate books showed amounts to be loans. But the court noted corporate formalities for treating it as a loan were not followed. Therefore, it was ruled as equity rather than debt.

In Pappas v. Commissioner, T.C. Memo 2002-127, the corporation was considered to not be in existence as an entity. The court noted:

“The first issue to be addressed concerns the identity of the taxpayer. Petitioner contends that she, individually, is not liable for the taxes at issue; instead, she argues, the corporation Real Services is liable for any taxes that may be owing, because Real Services received the unreported income that respondent has attributed to petitioner in his determination.”

The court then concludes that the corporation did not receive the income, but rather, the individual who owned the corporation received the income. In its conclusion, it said:

“Petitioner consistently ignored corporate formalities. After the organizational meeting for Real Services, there is no indication of another meeting of a board of directors. Real Services maintained no office separate from petitioner's personal address, and petitioner was its only purported employee. There is no evidence that Real Services furnished to outside parties any papers relating to petitioner's employment, such as tax withholding forms or other payroll records. There are no meaningful corporate records…”

“In sum, there is no evidence that Real Services engaged in business as a separate entity….”

“We conclude that Real Services functioned merely as an alter ego of petitioner and is therefore a sham corporation. As a result, we disregard the existence of Real Services for purposes of Federal taxation; the income at issue is properly taxed to petitioner individually.”

In Keller v. Commissioner, 77 T.C. 1014, the court recognized the Personal Service Corporation as a viable entity because among other evidence, “Substantial care was taken to observe the requisite corporate formalities in connection with the organization of Keller, Inc., including the execution of an employment agreement between the corporation and petitioner. Thus, without question, Keller, Inc., was organized as a corporation under Oklahoma law…”

Gee, I thought just filing incorporation papers with the state made you a corporation. Why wasn’t that enough? Why the need for corporate formalities and an employment agreement? (sarcastic tone intended)

Would you like me to continue, or do you get my point?

[JON]

Minnesota

In Minnesota the corporation does not exist with the intial filing with the secretary of state for income tax purposes. It begins with having assets or starting to do businessealyier of the two.. Other states may be different, but the IRS does not want blace sheets sent. Even if state made a differnce what is the penalty for not filing blank seets for income tax purposes. Minnesota has a minimum fee-with no activity or balance sheet there is nothing to compute it on...