Schedule C vs 1120

[OldJack]

Ridiculous

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

Your statements are getting absolutely ridiculous just because you don't want to admit you lack knowledge on the subject. You don’t think tax rules are sometimes black and white? Sure there are gray areas of taxes also. But, are you now contending 2+2 is not 4 ?

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.

Give us a federal tax code or any cite that a corporation is required to have corporate minutes for the federal government. There is none! The only use of minutes for the IRS might be to prove the taxpayer corporation's position of having something like a written plan as required, although that is not required to be in corporate minutes. Corporate minutes would only be required by the state and not all states say anything about that. I do agree that you should have corporate minutes as they may be needed for civil court cases if you are being sued. The IRS gave up on viewing/auditing corporate minutes back in the years when I first started practice.

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.

In 30+ years of practice I have not seen such or seen a court case where a corporation was disregarded and taxed as an individual. That statement is nonsense and not worth further comment... I can't believe that you would make such a statement where other professionals could read it.

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?

I have not said anything about weather his assets were in or out of the business you have been making that an issue. Sole proprietorship assets do not transfer automatically but business transactions (income and expense) in the name of the corporation do become corporation transaction automatically. The taxpayer's operation of his business would determine what is in or out. When are you going to get over the fact that exchanging assets for stock has little to do with tax ability of corporate transactions that produce income or expenses?

It is in the IRS's interest to make transactions be in the corporation as the corporation owners most likely have not elected S-corp status. Therefore any taxable income is subject to double tax in the corporation as the owner has probably taken the money out without payroll filings and as a C-corp the distribution would be a taxable dividend resulting in the double tax. There is no reason for the IRS to want to classify the transactions as sole-proprietorship transactions unless they were first income in the corporation where the corporation paid a tax.

[OldJack]

response to Jon

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...

I was not aware of Minnesota's rules. However, Minnesota is not the federal government. Does the state of Minnesota recognize corporate income from transactions in the name of the corporation which would create equity for the balance sheet? ie: the corporation receives a 1099 under the corporate federal ID for medical services provided showing $$ as income. Would the Minnesota require a tax return to report the income as corporate income? What is the penalty if there is corporate income? I expect such transactions would be starting business without assets?

[Bees Knees]

In 30+ years of practice I have not seen such or seen a court case where a corporation was disregarded and taxed as an individual. That statement is nonsense and not worth further comment... I can't believe that you would make such a statement where other professionals could read it.

You must have missed my post on that. Let me summarize:

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.”

[Bees Knees]

Old Jack

It would help, for argument sake, if you could provide citations to support your arguments.

[OldJack]

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.

First off... I am not going to go read all these cases just to prove something that doesn’t have to be proved.

Transactions in this case appear to have to do with classification on the corporation books and not the shareholder in that the corporation is deemed to have received a capital contribution from the shareholder rather than a loan.

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

“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.”

Obviously if there were no evidence of business transactions as an entity it would be disregarded. I would agree. That is not what we have been talking about. The landscape business MAY have operated as a corporation being a separate entity and that would not have been disregarded.

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?

You evidently do not know what a “Personal Service Corporation” is all about. It is a C-corp that has a status that causes the income to be taxed at the maximum tax rate bracket. Personal Service Corporation status is achieved from the majority of services being provided by the owners as employees verses non owner employees and has little to do with any formalities of the corporation itself.

Your point is you want to nit pick your way out of your previous statements by changing the subject. I am really getting tired of providing you with education.

[Bees Knees]

First off... I am not going to go read all these cases just to prove something that doesn’t have to be proved.

No, of course not. That would be too much bother to provide backup for your statements.

Obviously if there were no evidence of business transactions as an entity it would be disregarded. I would agree. That is not what we have been talking about. The landscape business MAY have operated as a corporation being a separate entity and that would not have been disregarded.

So now we are using the term MAY. That works both ways. The landscape busines MAY NOT have operated as a corporation being a separate entity...like maybe none of its assets were transfered to the corporation.

[BOB W]

What's up..............................

I can't believe I'm reading these posts by some of the TOP posters and their failure to recognize the fundermental fact that a corporation was formed with a state, not the IRS. With that formation comes an OBLIGATION to that state for proper reporting. At a minimum, annual franchise fee MUST be paid. I don't know any state that does not have an annual franchise fee, maybe FL.

The issue of the landscaper not having to file a corporate return may be correct. But the person who formed the corporation has an obligation in filing a return each and every year, whether there is activity or not. Many states will dissolve corporations for non-filed corporate returns.

Come on guys, this is like reading posts on the QF board.

[Bees Knees]

Sorry for getting worked up, but....

The issue of the landscaper not having to file a corporate return may be correct. But the person who formed the corporation has an obligation in filing a return each and every year, whether there is activity or not. Many states will dissolve corporations for non-filed corporate returns.

And the point is, so what? Let the corporation dissolve. If no assets were transferred to it, it was never a corporation. So let it go away. Who cares?

The issue has to do with a guy who hasn't filed a tax return in a couple of years. Don't you think life would be a lot simpler for tax filing purposes if we could just let the corporation disappear and pretend it never existed?

[OldJack]

So now we are using the term MAY. That works both ways. The landscape busines MAY NOT have operated as a corporation being a separate entity...like maybe none of its assets were transfered to the corporation.

"May" in my comment has to do with whether the corporation has income or not and as such that is required to be reported on form 1120. What is there about that "May" that you don't understand? Maybe the original poster could tell us how the business was operated and you would be satisfied and we would not need the "May".

[Bees Knees]

"May" in my comment has to do with whether the corporation has income or not and as such that is required to be reported on form 1120.

And I hold to my position that the corporation cannot have taxable income until somebody does something to get it started, like transfer assets into it.

If someone can't even follow the obvious first step in starting a corporation by issuing stock and transferring assets to it in exchange for such stock, how can you argue they did something to trigger the receipt of taxable income?

I'm sorry for being rude, but pretending to be a corporation by putting "Inc." on advertising is not enough to make the leap that you are a corporation for federal tax purposes and the income has to be taxed as a corporation.

[BOB W]

Corp...............

I agree totally, let the corp dissolve by proclamation of the state for failure to file tax returns. But the issue of a corporation existence is not an IRS issue. All corporations exist once it is formed by a state.

It is kind of like a Trust, they are no good unless they are funded.

The crux of this thread is, was the corporation "funded" or not. If not, the landscaper files a Sch C. And if he wants to "fund" the corp going forward, he needs to file the old years first. Chances are the S Election was never filed for, but............................

[Bees Knees]

Great. Now if we can get OldJack to agree with you, Bob, then we can all hold hands and go out and hug a tree or something.

Time to move on....

[BOB W]

Funding

[QUOTE=Bees Knees]And the point is, so what? Let the corporation dissolve. If no assets were transferred to it, ....... it was never a corporation........ So let it go away. Who cares?

YES IT WAS A CORPORATION, it was just not FUNDED to apply any operating business to it.....................

[OldJack]

If someone can't even follow the obvious first step in starting a corporation by issuing stock and transferring assets to it in exchange for such stock, how can you argue they did something to trigger the receipt of taxable income?

How about a cash bank account with the corporation federal identification number on it? "Maybe" the original poster would tell us if that was the case. Would that be enough for you Bees Knees?

The fact that the taxpayer in this case did not file a 2003 corporate tax return as well as did not file his personal tax return for the year 2003 sound a little fishy and a lot like someone that didn't file either because he knew he should file a corporate tax return and didn't know how. There is no use in further discussion of this without actual facts.

[Gretel]

Maybe

we can agree on saying the shell of the corporation was there but it was never filled, therefore not need to file a tax return and throw the shell in the trash.

If it was filled by opening a bank account (thus transferring assets to the corporation) then it's a different story, but we don't know about that, right?