Professional Tax Research Solutions from the Founder of Kleinrock. tax and accounting research
Parker Tax Pro Library
Accounting News Tax Analysts professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
federal tax research
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software Federal Tax Research tax research


Accounting Software for Accountants, CPA, Bookeepers, and Enrolled Agents

CPA Tax Software

        

 

Unauthorized Incorporation of Business Precludes Deduction of Business Expenses on Form 1040.

(Parker Tax Publishing September 22, 2015)

The unauthorized act by a business owner's son of incorporating his father's business was ratified by the father when he filed corporate documents with the state; thus, expenses of the business could not be deducted on the father's personal income tax returns. Rochlani v. Comm'r, T.C. Memo. 2015-174.

Background

Manjit Rochlani started Ultimate Presales in 2006 and was the proprietor of the business. Through Ultimate Presales, Rochlani and his wife bought and resold sporting, concert, and other tickets. Without permission from his parents and while he was still a minor, the Rochlanis' son, Khushal, incorporated Ultimate Presales in Michigan in July 2006 using an online legal service. Khushal was unaware of the tax differences between a sole proprietorship and a corporation when he registered the business as a corporation. When the paperwork arrived, Mr. Rochlani asked Khushal about the incorporation but did nothing to stop or unwind the incorporation process.

Subsequently, Rochlani filed corporate annual reports for Ultimate Presales with the Michigan Department of Energy, Labor & Economic Growth. The Rochlanis used personal credit cards to make all purchases related to the business because Ultimate Presales did not have a business credit card. Further, all business expenses were paid from, and business income was deposited into, the Rochlanis' personal bank accounts.

On their Form 1040s for 2008 and 2009, the Rochlanis attached Schedule C, Profit or Loss From Business, identifying the principal business of Ultimate Presales as "Sell Goods" in 2008 and "Sell Goods and Tickets" in 2009. The Rochlanis reported Schedule C losses of $41,610 for 2008 and $44,066 for 2009. The reported business expenses included business use of their home, supplies expenses, office expenses, legal and professional expenses, advertising expenses, travel expenses, car and truck expenses, other expenses, contract labor expenses, depreciation and Code Sec. 179 expenses, and commissions and fees expenses.

Upon auditing the returns, the IRS adjusted the Rochlanis' tax liabilities to reflect the removal of the Schedules C, asserting that Ultimate Presales was a corporation. The Rochlanis took their case to the Tax Court, arguing that the court should disregard the corporate form.

Analysis

The Tax Court held that the Rochlanis could not disavow the corporate form and thus upheld the IRS's adjustments. The issue, the court said, was whether Ultimate Presales is a corporation for federal income tax purposes. To decide whether Ultimate Presales should be respected as a corporation, the court looked at whether the Rochlanis were bound by Khushal's unauthorized act of registering Ultimate Presales as a corporation.

While it was clear to the court that Khushal was not authorized or instructed by Rochlani to register Ultimate Presales as a corporation, the court noted that, upon learning that the business had been registered, Rochlani did nothing to undo what his son had done. In fact, the court observed, Rochlani ratified his son's act. Under Michigan law, unauthorized acts may be ratified explicitly or implicitly. And the unauthorized acts of an agent are ratified if the principal accepts those acts with knowledge of the material facts. While Khushal's act of incorporating Ultimate Presales was unauthorized, Rochlani thereafter respected, at least in part, the corporate form by filing annual reports with the Michigan Department of Energy, Labor & Economic Growth. In doing so, the court said, he recognized and ratified the corporate form.

The Tax Court concluded that, because Ultimate Presales was a corporation, the Rochlanis were not entitled to deduct losses from Ultimate Presales on their personal 2008 and 2009 returns.

For a discussion of the tax implications in choosing an entity in which to operate a business, see Parker Tax ¶29,500. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com


Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

    ®2012-2018 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance